Assume that Brazil has a constant money supply and that it devalues its currency.The monetary approach to devaluation reasons that one of the following tends to occur for Brazil:
A) Domestic prices rise--purchasing power of money falls--consumption falls
B) Domestic prices rise--purchasing power of money rises--consumption rises
C) Domestic prices fall--purchasing power of money rises--consumption falls
D) Domestic prices fall--purchasing power of money rises--consumption rises

Question

Quizplus · Accepted Answer

When a country devalues its currency, domestic prices tend to rise because imported goods become more expensive. This leads to a fall in the purchasing power of money, which causes consumption to fall as it becomes more expensive to purchase goods and services. Therefore, option A is the correct choice.

Assume That Brazil Has a Constant Money Supply and That