Under a system of flexible exchange rates, an increase in the domestic price level will reduce the amount of domestic goods demanded since
A)lower real money balances will increase interest rates and reduce domestic spending
B)domestic goods will become less competitive with foreign goods and net exports will decrease
C)higher domestic prices will reduce disposable income and therefore consumption
D)both A) and B)
E)both B) and C)

Question

Quizplus · Accepted Answer

Under a system of flexible exchange rates, an increase in the domestic price level can lead to lower real money balances, which in turn can increase interest rates and reduce domestic spending (A). Additionally, higher domestic prices can make domestic goods less competitive compared to foreign goods, leading to a decrease in net exports (B). Both A and B are correct, making D the correct choice.

Under a System of Flexible Exchange Rates, an Increase in the Domestic