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

Question

Quizplus · Accepted Answer

When the U.S. price level falls, U.S. goods become cheaper relative to foreign goods. This makes U.S. residents more likely to buy domestic goods and less likely to buy foreign goods, reducing the demand for foreign currency to buy those goods. Consequently, the value of the foreign currency in terms of the U.S. dollar falls, which means the real exchange rate (the price of foreign goods in terms of domestic goods) falls. At the same time, lower prices in the U.S. can make U.S. bonds more attractive relative to foreign bonds because they effectively offer a higher real return, leading to an increased demand for U.S. bonds and a decreased demand for foreign bonds.

Other Things the Same, If the U