An exchange rate shock causes P to _____ and Y to _____.

Name: An exchange rate shock causes P to _____ and Y to _____.
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Question

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An exchange rate shock causes P (price level) to increase because a decrease in the value of the domestic currency makes imports more expensive, leading to higher prices. At the same time, it causes Y (output) to decrease because imports are more expensive, leading to a decrease in net exports, which reduces aggregate demand and output.

An Exchange Rate Shock Causes P to _____ and Y