An increase in the price level causes the interest rate to
A)increase, the dollar to depreciate, and net exports to increase.
B)increase, the dollar to appreciate, and net exports to decrease.
C)decrease, the dollar to depreciate, and net exports to increase.
D)decrease, the dollar to appreciate, and net exports to decrease.

Question

Quizplus · Accepted Answer

An increase in the price level would lead to an increase in the demand for money, causing an increase in the interest rate. A higher interest rate would make the domestic currency more attractive to foreign investors, leading to an appreciation of the currency (i.e., an increase in the value of the dollar). An appreciation of the currency would make exports more expensive, resulting in a decrease in net exports (i.e., exports - imports). Therefore, increase in price level would cause interest rate to increase, the dollar to appreciate, and net exports to decrease. This matches only choice (B).

An Increase in the Price Level Causes the Interest Rate