Under a System of Flexible Exchange Rates, an Increase in the Domestic

question 36

Multiple Choice

Under a system of flexible exchange rates, an increase in the domestic price level will reduce the amount of domestic goods demanded since

• A)lower real money balances will increase interest rates and reduce domestic spending
• B)domestic goods will become less competitive with foreign goods and net exports will decrease
• C)higher domestic prices will reduce disposable income and therefore consumption
• D)both A) and B)
• E)both B) and C)

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Definitions:

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