Question

In the short run, an increase in the price of imported goods will cause
A) an increase in the interest rate.
B) a reduction in the price level
C) an increase in output.
D) all of the above
E) none of the above

Can you explain your answer as well?

Answer 1

The answer is (E) none of the above.
Increase in price of imports will fall to a certain level. Then the percentage fall in the quantity of imports will be much lower than the percentage rise in the price. The total expenditure on imports will rise sharply in the short run. This will lead to large negative balance of payments including fall in interest rates (Amann, 2011).