Question

Other things the same, if the price level falls, domestic interest rates
a.

rise, so domestic residents will want to hold more foreign bonds.
b.

fall, so domestic residents will want to hold fewer foreign bonds.
c.

fall, so domestic residents will want to hold more foreign bonds.
d.

rise, so domestic residents will want to hold fewer foreign bonds.

Answer 1

If the price level falls, it generally leads to a decrease in interest rates, as lower prices can reduce the demand for money. When domestic interest rates fall, the return on domestic assets becomes less attractive compared to foreign assets. Therefore, domestic residents are likely to seek higher returns by holding more foreign bonds.

Thus, the correct answer is:

**c. fall, so domestic residents will want to hold more foreign bonds.**