The chapter notes that the rise in the U.S. trade deficit during the 1980s was d

Question

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 decline 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 net exports on the U.S. market for foreign exchange Supply Demand Supply and Quantity of Dollars According to this model, which of the following statements are true as a result of the quality change? Check all that apply. O The trade balance increases. O The real exchange rate increases. Net capital outflow is unchanged. O There is no change in the real interest rate The claim that some people made in the popular press consistent with the model in this chapter. True or False: The change in the real exchange rate that resulted from the decline in the quality of U.S. products may increase our standard of living True False

Explanation / Answer

Ans:

1) Reduced

If the quality of U.S. goods has declined then at a given real exchange rate there would be reduction in the netexports thus reducing the demand for dollars. This will shifting the demand curve for dollars to the left in the market.

2) Following will apply

Net capital outflow is unchanged

Since the demand curve for dollars has shifted left and this will lead to a leads to a decline in the real exchange rate. The net capital outflow is unchanged there will be no change in equilibrium net exports or the trade balance.

3) Incorrect

A change in quality of U.S. goods will not lead to a rise in trade deficit and hence,the claim of press is incorrect.

4) False

when there is decline in the real exchange rate the amount of foreign goods we get for our goods will be less and this can be seen has decline in standard of living.

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