Question

Other things the same, as the price level falls, the exchange rate rises. A rise in the exchange rate leads to a decrease in net exports.
a. true
b. false

Answer 1

The statement, other things the same, as the price level falls, the exchange rate rises. A rise in the exchange rate leads to a decrease in net exports, is false.

When the exchange rate falls, the relative price of domestic goods and services falls while the relative price of foreign goods and services increases. Thus, the change in relative prices will increase exports and decrease its imports.

When an exchange rate changes, the value of one currency will go up while the value of the other currency will go down. When the value of a currency increases, it is said to have appreciated.

Hence, option B is correct.

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