Free Online CFA Level 1 Mock Exam 2


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10. One reason for the downward sloping aggregate demand curve is that higher price levels imply a real exchange rate:

A. depreciates, making domestic goods cheaper in other countries and imports less competitive, resulting in a higher level of net exports.

B. appreciates, making domestic goods more expensive in other countries and imports more competitive, resulting in a lower level of net exports.

C. appreciates, making the country’s exports and imports less competitive and leading to lower net exports.

Correct Answer: B

Answer Explanation:

An increase in the domestic price level leads to an appreciation of the real exchange rate, making domestic goods more expensive in other countries and thus reducing exports. This also reduces the domestic prices of non-domestic goods and increases imports. The result is a reduction in demand for domestic goods and services.

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