Other things the same, a decrease in the price level makes the interest rate increase, which leads to an appreciation of the dollar in the foreign-currency exchange.

Question

Quizplus · Accepted Answer

According to the basic theory of aggregate demand and supply, a decrease in the price level causes a decrease in the interest rate, which in turn leads to a depreciation of the currency. This is because a lower price level means a lower demand for money, which causes the interest rate to fall. A lower interest rate makes the currency less attractive to investors, leading to a decrease in demand for the currency and a depreciation in its value.

Other Things the Same, a Decrease in the Price Level