What are the effects of an increase in the price level?
A) The interest rate increases, the dollar depreciates, and net exports increase.
B) The interest rate increases, the dollar appreciates, and net exports decrease.
C) The interest rate decreases, the dollar depreciates, and net exports increase.
D) The interest rate decreases, the dollar appreciates, and net exports decrease.

Question

Quizplus · Accepted Answer

An increase in the price level leads to an increase in the interest rate, which in turn leads to an appreciation of the domestic currency (the dollar in this case) as foreign investors are attracted to higher returns. This appreciation makes exports more expensive and hence reduces net exports.

What Are the Effects of an Increase in the Price