The exchange-rate effect implies that when the price level increases:
A) net exports decrease
B) net exports increase
C) net exports do not change
D) any of the above is possible

Question

Quizplus · Accepted Answer

The exchange-rate effect operates through changes in the relative prices of goods and services between countries due to changes in exchange rates. When the price level increases, it reduces the competitiveness of domestic goods and services relative to foreign goods and services, causing a decrease in net exports.

The Exchange-Rate Effect Implies That When the Price Level Increases