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According to the foreign price effect explanation for why the aggregate demand curve slopes downward, what happens to net exports when the domestic price level rises while prices abroad stay fixed?
ANet exports rise, since exports get more competitive
BNet exports are unaffected by the price level
COnly imports change; exports stay exactly the same
DNet exports fall as exports cost more and imports cost less
Answer & Solution
Correct answer: D. Net exports fall as exports cost more and imports cost less
1. If domestic prices rise while foreign prices stay fixed, domestic goods become relatively more expensive to foreign buyers.
2. Fewer foreigners want to buy the now relatively pricier exports, so the quantity of exports sold falls.
3. At the same time, foreign goods look relatively cheaper, so the quantity of imports rises.
4. Falling exports combined with rising imports reduces net export spending, which is part of aggregate demand.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.2 | Building a Model of Aggregate Demand and Aggregate Supply_
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