If the Japanese price level falls relative to the price level in the United States, then:

Question

Quizplus · Accepted Answer

The correct answer is E because if the Japanese price level falls relative to the price level in the United States, then Japanese goods will become cheaper relative to US goods, and US goods will become more expensive relative to Japanese goods. This will lead to a decrease in demand for US exports by Japanese consumers, a decrease in the demand for dollars by Japanese importers, and an increase in the supply of dollars by Japanese exporters. As a result, the value of the dollar will fall.

If the Japanese Price Level Falls Relative to the Price