Questions: When the price level increases, goods in other countries are relatively cheaper. As a result, a country's imports increase, displacing the demand for domestic production. What is the term for the relationship described above? Choose 1 answer: (A) The interest rate effect B Sticky wage theory (C) The exchange rate effect (D) Misperceptions theory (E) The real wealth effect

The answer is (C): The exchange rate effect.

Explanation for each option:

(A) The interest rate effect: This refers to how changes in the price level can affect interest rates, which in turn influence investment and consumption. It is not directly related to the relative price of goods between countries.

(B) Sticky wage theory: This theory suggests that wages are slow to adjust to changes in economic conditions, which can lead to unemployment or other economic inefficiencies. It does not directly address the relative price of goods between countries.

(C) The exchange rate effect: This describes how changes in the price level can affect the exchange rate, making domestic goods more expensive relative to foreign goods, thus increasing imports. This is the correct term for the relationship described in the question.

(D) Misperceptions theory: This theory suggests that producers may misinterpret changes in the overall price level as changes in the relative price of their products, leading to incorrect production decisions. It does not directly relate to the relative price of goods between countries.

(E) The real wealth effect: This effect describes how changes in the price level can affect the real value of money holdings, influencing consumer spending. It does not directly address the relative price of goods between countries.

In summary, the relationship described in the question is best explained by the exchange rate effect, as it involves the relative price of goods between countries and the impact on imports.