Other things equal, a rise in foreign interest rates leads to __________ in the home Country's equilibrium level of income and to __________ in the home country's price Level in the short run.
A) a rise; a fall
B) a rise; no change
C) no change; a fall
D) a rise; a rise

Question

Quizplus · Accepted Answer

A rise in foreign interest rates can lead to capital outflows from the home country as investors seek higher returns abroad. This can result in a depreciation of the home country's currency, making exports cheaper and imports more expensive. The increased demand for exports and reduced demand for imports can lead to a rise in the home country's equilibrium level of income. Additionally, the depreciation of the currency can lead to higher import prices, contributing to a rise in the overall price level in the short run.

Other Things Equal, a Rise in Foreign Interest Rates Leads