An exchange rate shock would tend to cause both an increase in the price level and a decline in real GDP.

Question

Quizplus · Accepted Answer

An exchange rate shock, such as a sudden depreciation of the domestic currency, can lead to higher import prices, contributing to inflation (increase in the price level) and can also make exports cheaper and imports more expensive, potentially reducing domestic consumption and investment due to higher prices for imported goods and services, which can lead to a decline in real GDP.

An Exchange Rate Shock Would Tend to Cause Both an Increase