When the exchange rate falls, the average price level rises and unemployment decreases.

Question

Quizplus · Accepted Answer

When the exchange rate falls, the domestic currency becomes cheaper relative to foreign currencies. This makes exports cheaper and imports more expensive, leading to an increase in exports and a decrease in imports. The increase in exports leads to an increase in production and employment, which in turn leads to a decrease in unemployment. The increase in imports leads to a decrease in the demand for domestic goods and services, which in turn leads to a decrease in the average price level.

When the Exchange Rate Falls, the Average Price Level Rises