Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

When the price level increases, the purchasing power of money held on hand and in bank accounts declines. This decline makes people feel less wealthy so that they lend less. The reduction in lending causes the interest rate to rise. The rise in interest rates discourages spending on investment goods so that the aggregate quantity of goods and services demanded decreases. As the interest rate increases, the supply of dollars in the market for foreign-currency exchange falls as people wish to purchase fewer foreign assets. This makes the dollar appreciate which decreases net exports.