10. Trade and labor mobility Suppose that the U.S. dollars-Brazilian reais excha

Question

10. Trade and labor mobility Suppose that the U.S. dollars-Brazilian reais exchange rate is flexible and is determined by the forces of demand for and supply of the two currencies Assume also that labor is immobile between the United States and Brazil due to high transportation costs. Which of the following situations is likely to happen as a result of a simultaneous decrease in the demand for U.S. goods and increase in the demand for Brazilian goods? O The U.S. unemployment rate rises at first, but then it drops as U.S. dollars depreciate against Brazilian reais. O The Brazilian unemployment rate increases, and the country undergoes bad economic times for a sustained period The U.S. unemployment rate rises at first, but it soon drops as unemployed Americans move to Brazil for employment. The U.S. unemployment rate increases, and the country undergoes bad economic times for a sustained period. Grade It Now Save & Continue Continue without saving

Explanation / Answer

A decrease in the demand for the US goods will decrease the US exports, as exports are part of the aggregate demand it will cause a drop in the demand and increase the unemployment rate in the US.

Increase in the demand for the Brazilian goods will cause imports to increase. At a high import, we have more US dollar supply i.e. more dollar leaving the country to Brazil. It will cause a depreciation in the value of Dollar and at a depreciated rate the imports will fall cause they are costlier now. After it, the US will consume its own goods increasing local demand and decreasing the unemployment.

The answer is "A", Unemployment will increase initially but decrease after depreciation of the dollar.

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