An increase in the domestic price level will:
A)shift the IS curve to the right.
B)shift the LM curve to the right.
C)shift the FE curve to the left.
D)lead to a surplus in the balance of payments.

Question

Quizplus · Accepted Answer

An increase in the domestic price level will reduce the competitiveness of domestic goods and services, leading to a lower demand for exports and a higher demand for imports. This will shift the FE (foreign exchange) curve to the left, indicating a lower equilibrium level of output and a higher exchange rate. It will not affect the IS or LM curves, which represent the domestic economy's output and interest rate determination, respectively. A surplus in the balance of payments is not necessarily related to changes in the price level but rather reflects a situation where a country's exports exceed its imports.

An Increase in the Domestic Price Level Will