Asked by Brittany Cates on Jul 07, 2024
Verified
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.
Real Exchange Rate
The rate at which a person can trade the goods and services of one country for the goods and services of another.
Price Level
A measure indicating the average price of goods and services in an economy at a given time.
U.S. Residents
Individuals who live in the United States, including citizens, permanent residents, and long-term visitors.
- Gain insight into the determinants of aggregate demand and how variations in price levels influence spending on investment and net exports.
Verified Answer
AU
Asmat UllahJul 09, 2024
Final Answer :
B
Explanation :
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.
Learning Objectives
- Gain insight into the determinants of aggregate demand and how variations in price levels influence spending on investment and net exports.
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