Other things the same,if the U.S.price level falls,then
A)U.S.residents want to buy more foreign bonds.The real exchange rate rises.
B)U.S.residents want to buy more foreign bonds.The real exchange rate falls.
C)U.S.residents want to buy fewer foreign bonds.The real exchange rate rises.
D)U.S.residents want to buy fewer foreign bonds.The real exchange rate falls.

Question

Quizplus · Accepted Answer

When the U.S. price level falls, domestic goods become relatively cheaper than foreign goods. This makes U.S. residents want to buy more foreign goods, which means they need more foreign currency to pay for those goods. To get the foreign currency, U.S. residents sell dollars, which causes the value of the dollar to fall in the foreign exchange market. As the value of the dollar falls, the real exchange rate also falls. Since the nominal exchange rate and the foreign price level remain constant, the decrease in the real exchange rate reflects a depreciation of the dollar. As a result, U.S. residents want to buy more foreign bonds, which pay higher interest rates than U.S. bonds, to take advantage of the higher returns in foreign markets.

Other Things the Same,if the U.S.price Level Falls,then