Question

Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar torise in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will thereforefall , and the number of foreign products purchased by domestic consumers and firms (imports) willrise . Net exports will thereforefall , causing the quantity of domestic output demanded tofall . This phenomenon is known as theexchange rate effect

Answer 1

rise, fall, rise, fall, fall, exchange rate

Step-by-step explanation:

When there is a change in the level of price it will cause the real value to change as well. This is due to the fact that real value is basically relative price i.e., nominal value adjusted by inflation.

This rise in price effects the demand for exports, which in return falls due to higher goods rates. And the effect is opposite for imports which would now rise. The combination effect of imports and exports results in the change in the net exports which would also fall due to rise in imports and fall in the exports. Overall, this effect is known as the exchange rate effect.