Question

As the price level rises, the cost of borrowing money will , causing the quantity of output demanded to . This phenomenon is known as the effect. Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore , and the number of foreign products purchased by domestic consumers and fir

Answer 1

Increase; decrease; interest rate effect; increase; decline; rise.

Step-by-step explanation:

As the price level increases, the purchasing power of money declines. People will need more money to make transactions. As a result, the demand for money increases.

This increase in demand for money will cause the interest rate to increase. This implies that the cost of borrowing is rising. They will cause a decrease in investment and thus output level.

This phenomenon of fall in output level because of the rise in the cost of borrowing as a result of inflation is called the interest-rate effect.

The higher interest rate will attract capital from abroad. This inflow of capital will cause the demand for the domestic currency to increase. As a result, the value of the domestic currency in the foreign exchange market will increase.

This appreciation in the value of the domestic currency will make exports expensive and imports cheaper. This will cause the export demand to fall and imports to increase. Consequently, net exports will decrease.