Which of the following best describes the effects of an increase in the price level?
A)Real exchange rates and interest rates rise.
B)Real exchange rates and interest rates fall.
C)Real exchange rates fall, and interest rates rise.
D)Real exchange rates rise, and interest rates fall.

Question

Quizplus · Accepted Answer

An increase in the price level typically leads to higher interest rates as the central bank may raise rates to combat inflation. Additionally, higher domestic prices can make exports more expensive and imports cheaper, leading to an appreciation of the real exchange rate.

Which of the Following Best Describes the Effects of an Increase