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 increase/decrease?
Indicate the effect of this shift in net exports on the U.S. market for foreign exchange.
(Draw a graph)
According to this model, which of the following statements are true as a result of the quality change? Check all that apply.
There is no change in the real interest rate.
Net capital outflow is unchanged.
There is no change in the trade balance.
The real exchange rate declines.
True or False: The claim that some people made in the popular press is consistent with the model in this chapter.
True or False: A decline in the quality of U.S. products may increase our standard of living because of a decline in the real exchange rate.
An economist discussing trade policy in the New Republic wrote: "One of the benefits of the United States removing its trade restrictions [is] the gain to U.S. industries that produce goods for export. Export industries would find it easier to sell their goods abroad—even if other countries didn’t follow our example and reduce their trade barriers."
A reduction in restrictions of imports would raise/reduce net exports at any given real exchange rate, thus shifting the demand curve for dollars to the left/right. This causes the real exchange rate to increase/decrease, increasing/decreasing net exports. However, net capital outflow is unchanged, so the equilibrium level of net exports increases/decreases/remains unchanged. This means that both imports and exports fall/only exports rise/only imports rise/both imports and exprts rise.
