D) P , the foreign price level. Given the demand for good in the domestic market, the decrease in supply of goods will lead to increase in the price level. Thus, an increase in the price level (i.e.,inflation) will cause an increase in average interest rates in an economy. The domestic currency price of a representative foreign expenditure basket is A) P, the domestic price level. E) a fall in government purchases. B) a rise in desired consumption. E) P times E, the foreign price level times the nominal exchange rate ♦ causes a proportional increase in the domestic price level, ♦ causing a proportional depreciation in the domestic currency (through PPP). ♦ same prediction as long run model without PPP 2. C) P times E, the domestic price level times the domestic price level. The term used to describe a percentage increase in a country’s price level over a period of time. For a given domestic and foreign price level, an increase in the nominal exchange rate _____ the real exchange rate. Multiple Choice increases Correct decreases may either increase or decrease offsets any change in Explanation All else equal, an increase in the nominal exchange rate … An increase in the price level will: A) increase net exports: B) reduce the value of household debt and increase investment: C) increase production costs and reduce short-run aggregate supply: D) reduce the purchasing power of household wealth and reduce consumption: 2: Answer the next question using the following graph: (25.0K) Refer to the graph. This means that a rise in the domestic price level will cause net expenditure on foreign goods to fall. Interest rates: a rise in the domestic interest rate ♦ lowers domestic money demand, ♦ increasing the domestic price level, The Sum of the Price Level Effect: A lower price level increases autonomous con­sumption (the wealth effect), autonomous investment (the interest rate effect) … Of increase, decrease, or stay the same, the effect on the equilibrium interest rate when the domestic price level decreases, ceteris paribus. 13) Suppose there is an exogenous increase in the domestic price level. 3. The global increase in domestic violence during the lockdown period has received relatively little attention, though CNN recently reported on the increase south of the US border. Explain each. D) a downward shift of the net export function. B 9 In contrast, a decrease in the price level ( deflation) will cause a decrease in average interest rates in an economy. 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