The exchange rate between the U.S. and Japan is floating, e.g. determined by the

Question

The exchange rate between the U.S. and Japan is floating, e.g. determined by the market. Suppose the U.S. government inposes import quotas on Japanese products. Answer the following questions:

a. The quotas increase spending on domestic products. How does this affect the U.S. macroeconomy? Explain.

b. What affect do the changes in the macroeconomy described by you in part a. have on the demand for U.S. imports from Japan? E.g. if the initial reduction in imports due to quota is 25 B, is the final reduction larger, smaller, or the same? Explain.

c. Explain what effect the quota will have on the demand for the yen and so the value of the yen relative price of the U.S. dollar. What does this change do to the U.S. demand for imports from Japan?

Explanation / Answer

IF U.S impose import quota on japanese product , this will increase spending on domestic products because the domestic citizen will buy domestic products at higher prices , Due to the imposition of quotas imported goods will be restricted to enter the domestic market ,which will increase the price of domesic goods .

Impact on US macroeconomy

Domestic consumption will fall and the domestic production will increase, Beacuse when Quota is imposed on imports , the domestic consumption will fall because now the buyers cannot buy imported goods, which will increase the domestic production to meet the demand

imposition of quotas will increase the domestic employment in the effected industries because of decreasing imports and increasing domestic production.

Low foreign wages: Restricting imports produced by foreign workers who receive lower wages prevents the purchases of consumers raising the incomes of poor foreign workers.

B.Import quota limits imports to the specified level of certainity, thats why the final reduction will be the same. In case of tarrif the trade effect is uncertain,because foreign exporter may absorb the all or part of the tariff by increasing their effeceincy of operation or by accepting lower profits, But exporters cannot do this with an import quota since the quantity of import allowed into the nation is clearly specified by the quota , The final reduction will be 25B.

C.Before the imposition of quota-U.S consumer pays for a Japanese good(imported goods) in dollars. The dollars make their way over to Japan through the foreign exchange markets where they are converted to yen. The result is to increase the supply of dollars in foreign exchange market, and also increase the demand for yen, As a result, the price or value of the dollar falls in relation to the yen. This is also known as a depreciation of the dollar.

After quota- US imports will decline,this will reduce the demand for yen , and now the dollar start appreciating

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