The exchange rate effect is the:
A)inverse relationship between prices and quantity of output demanded.
B)positive relationship between prices and quantity of output demanded.
C)inverse relationship between real interest rates and net exports.
D)positive relationship between real interest rates and net exports.

Question

Quizplus · Accepted Answer

The exchange rate effect describes how a change in the price level affects a country's exchange rate, which in turn affects the cost of its exports and imports, and ultimately, its net exports. A higher price level can make a country's goods more expensive relative to foreign goods, leading to a decrease in net exports. This is an inverse relationship between real interest rates, which influence exchange rates, and net exports.

The Exchange Rate Effect Is The