An increase in a country's price level generally causes an appreciation of the country's exchange rate.

Question

Quizplus · Accepted Answer

An increase in a country's price level typically leads to a depreciation of its exchange rate because higher prices reduce the country's competitiveness, making its exports more expensive and imports cheaper, thus increasing demand for foreign currencies and decreasing demand for the domestic currency.

An Increase in a Country's Price Level Generally Causes an Appreciation