MINDTAP Q Search this course Problems & Applications (Ch 32) Back to Assignment

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MINDTAP Q Search this course Problems & Applications (Ch 32) Back to Assignment Attempts: [111.8! ] Keep the Highest: 2/5 Koop the Highest 215 3. Problems and Applications Q3 The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit. On the other hand, some in the popular press have claimed that the increased trade deficit resulted from a dedline in the quality of U.s. products relative to foreign products. Assume that U.S. products did decline in relative quality during the 1980s. This caused net exports at any given exchange rate to Indicate the effect of this shift in het exports on the U.S. market for foreign exchange. suppy Demand Supply

Explanation / Answer

1. The net exports at given exchange rate to decline

2. The real exchange rate increases.

This implies, that the goods that one can get against its own products is high; but, as the quality decreases, the increase in exchange rate may not have been as high

There is a change in the real interest rate as the inflation decreases; the demand decreases, therefore inflation increases.

as the quality declines, price level declines, demand decreases.Therefore, inflation decreases

Real exchange rate,thus, increases

The trade deficit increases as imports increase, and, net capital outflow changes for imports & exports

3. is not consistent

4. a) True

There is an overall increase in the real exchange rate; but, a decrease in quality can decrease the real exchange rate, and, the standard of living

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