In the long run,a rise in a country's price level (relative to the foreign price level)causes its currency to ________,while a fall in the country's relative price level causes its currency to ________.

Question

Quizplus · Accepted Answer

When a country's price level rises (relative to the foreign price level), its goods become more expensive compared to foreign goods, which can cause a decrease in demand for the country's goods and therefore a decrease in demand for its currency, leading to a depreciation of the currency. Conversely, when a country's price level falls (relative to the foreign price level), its goods become relatively more affordable, leading to an increase in demand for the country's goods and therefore an increase in demand for its currency, leading to an appreciation of the currency. Therefore, the correct answer is C - a rise in price level causes the currency to depreciate, and a fall in price level causes the currency to appreciate.

In the Long Run,a Rise in a Country's Price Level