An increase in the price level reduces net exports because
A)it leads indirectly to a higher exchange rate.
B)it leads indirectly to a lower exchange rate.
C)it leads indirectly to a lower real interest rate.
D)it leads directly to higher real money balances.

Question

Quizplus · Accepted Answer

An increase in the price level can lead to a higher exchange rate because, as domestic goods become more expensive, foreign goods become relatively cheaper. This can cause the domestic currency to appreciate (increase in value) relative to foreign currencies, making exports more expensive and imports cheaper, thereby reducing net exports.

An Increase in the Price Level Reduces Net Exports Because