Which statement best describes the effects of a fall in the price level?
A) The real exchange rate and interest rates rise.
B) The real exchange rate and interest rates fall.
C) The real exchange rate falls, and interest rates rise.
D) The real exchange rate rises, and interest rates fall.

Question

Quizplus · Accepted Answer

A fall in the price level typically leads to lower interest rates as the central bank may ease monetary policy to counteract deflationary pressures. Additionally, a lower price level can make domestic goods cheaper relative to foreign goods, leading to a depreciation of the real exchange rate.

Which Statement Best Describes the Effects of a Fall in the Price