What happens when the price level rises?
A) The value of money rises, and exchange rates and interest rates also rise.
B) The value of money rises, while exchange rates and interest rates fall.
C) The value of money falls while exchange rates and interest rates rise.
D) The value of money falls, and exchange rates and interest rates also fall.

Question

Quizplus · Accepted Answer

When the price level rises, the value of money falls as it can purchase fewer goods and services. This can lead to an increase in interest rates as lenders demand higher compensation for inflation risk. In turn, higher interest rates can lead to an appreciation of the currency, which could lead to a decrease in exchange rates. Therefore, option C is the most appropriate choice.

What Happens When the Price Level Rises