You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. manufacturing industry is concerned about competition from overseas low-cost producers exporting their goods to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a tariff on imports would shrink the size of the trade deficit. The following exercise will help you to analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the tariff. Supply Demand Supply Demand QUANTITY OF DOLLARS Given this change, the dollar Fill in the following table with the effect of a tariff on the following items: Supply of Loanable Funds Real Interest Rate Net Capital Outflow Net Exports Change due to a tariff REAL EXCHANGE RATE (Units of foreign currency per dollar)
