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If the price level increases, then _____
If the price level increases, then _____.
a. the exchange rate will increase, causing U.S. goods to become cheaper and increasing the quantity demanded for domestic goods
b. imports increase but exports do not change. Therefore, there is no effect on the quantity demanded for goods and services
c. foreigners buy fewer American goods, leaving more goods for Americans and an increase in the quantity demanded for goods and services produced domestically
d. domestic goods are more expensive relative to foreign goods, which reduces quantity demanded for domestic goods
Expert Solution
Inflation refers to the sustained increases in price levels over time causing a unit of currency to purchase fewer goods and services than what it did previously. If price levels in an economy increase (presumably due to inflation), domestic goods will become more expensive as compared to foreign goods. This will lead to reduced demand for domestic goods.
Therefore, Option D is the correct choice.
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