Question

the international trade effect states that
a. an increase in the price level will lower net exports.
b. an increase in the price level will raise net exports.
c. an increase in the price level will lower imports.
d. an increase in the price level will raise exports.

Explanation:

The international trade effect (part of the aggregate demand - aggregate supply model) works as follows: When the domestic price level increases, domestic goods become relatively more expensive compared to foreign goods. This leads to a decrease in exports (since foreign buyers will buy less of the now more expensive domestic goods) and an increase in imports (since domestic buyers will buy more relatively cheaper foreign goods). Net exports are calculated as exports minus imports (\( \text{Net Exports}=\text{Exports}-\text{Imports} \)). So, an increase in the price level will cause exports to fall and imports to rise, which in turn lowers net exports.

• Option A: Matches the above explanation.
• Option B: An increase in price level should lower net exports, not raise them.
• Option C: An increase in price level makes foreign goods relatively cheaper, so imports should increase, not decrease.
• Option D: An increase in price level makes domestic goods more expensive for foreigners, so exports should decrease, not increase.

Answer:

A. an increase in the price level will lower net exports.