Question

exchange rate effect: a rise in the U.S. price level causes the U.S. interest rates to _______, the real value of the dollar in foreign markets ________, this _______ causes U.S. net exports to ________ which _______ the quantity of goods and services demandd

Answer 1

The exchange rate effect refers to the impact of changes in the U.S. price level on U.S. interest rates, the real value of the dollar in foreign markets, and U.S. net exports.

Step-by-step explanation:

The exchange rate effect refers to the impact of changes in the U.S. price level on U.S. interest rates, the real value of the dollar in foreign markets, and U.S. net exports. When the U.S. price level rises, U.S. interest rates also rise. This higher interest rate attracts foreign investors, leading to an increase in the demand for U.S. dollars and appreciation of the dollar in foreign markets.

As the dollar appreciates, U.S. goods become relatively more expensive compared to foreign goods. This reduces U.S. net exports because exports become more expensive and imports become cheaper. Therefore, an increase in the U.S. price level leads to a decrease in net export expenditures, reducing the quantity of goods and services demanded.