Suppose that a textile workers union encourages people to buy only American-made

Describe supply and demand in the market for loanable funds and the market for foreigncurrency exchange. How are these markets linked?

Why are budget deficits and trade deficits sometimes called the twin deficits?

Suppose that a textile workers union encourages people to buy only American-made clothes. What would this policy do to the trade balance and the real exchange rate? What is the impact on the textile industry? What is the impact on the auto industry?

What is capital flight? When a country experiences capital flight, what is the effect on its interest rate and exchange rate?

Japan generally runs a significant trade surplus. Do you think this is most related to high foreign demand for Japanese goods, low Japanese demand for foreign goods, a high Japanese saving rate relative to Japanese investment, or structural barriers against imports into Japan? Explain your answer

Suppose that Congress is considering an investment tax credit, which subsidizes domestic investment. a. How does this policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance? b. Representatives of several large exporters oppose the policy. Why might that be the case?

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, the popular press sometimes claims that the increased trade deficit resulted from a decline in the quality of U.S. products relative to foreign products. a. Assume that U.S. products did decline in relative quality during the 1980s. How did this affect net exports at any given exchange rate? b. Draw a three-panel diagram to show the effect of this shift in net exports on the U.S. real exchange rate and trade balance. c. Is the claim in the popular press consistent with the model in this chapter? Does a decline in the quality of U.S. products have any effect on our standard of living? (Hint: When we sell our goods to foreigners, what do we receive in return?)

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 abroadeven if other countries didnt follow our example and reduce their trade barriers. Explain in words why U.S. export industries would benefit from a reduction in restrictions on imports to the United States.

Suppose the French suddenly develop a strong taste for California wines. Answer the following questions in words and with a diagram. a. What happens to the demand for dollars in the market for foreign-currency exchange? b. What happens to the value of dollars in the market for foreign-currency exchange? c. What happens to the quantity of net exports?

A senator renounces her past support for protectionism: The U.S. trade deficit must be reduced, but import quotas only annoy our trading partners. If we subsidize U.S. exports instead, we can reduce the deficit by increasing our competitiveness. Using a three-panel diagram, show the effect of an export subsidy on net exports and the real exchange rate. Do you agree with the senator?

Suppose the United States decides to subsidize the export of U.S. agricultural products, but it does not increase taxes or decrease any other government spending to offset this expenditure. Using a three-panel diagram, show what happens to national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance. Also explain in words how this U.S. policy affects the amount of imports, exports, and net exports.

Suppose that real interest rates increase across Europe. Explain how this development will affect U.S. net capital outflow. Then explain how it will affect U.S. net exports by using a formula from the chapter and by drawing a diagram. What will happen to the U.S. real interest rate and real exchange rate?

Suppose that Americans decide to increase their saving. a. If the elasticity of U.S. net capital outflow with respect to the real interest rate is very high, will this increase in private saving have a large or small effect on U.S. domestic investment? b. If the elasticity of U.S. exports with respect to the real exchange rate is very low, will this increase in private saving have a large or small effect on the U.S. real exchange rate?

Over the past decade, some of Chinese saving has been used to finance American investment. That is, the Chinese have been buying American capital assets. a. If the Chinese decided they no longer wanted to buy U.S. assets, what would happen in the U.S. market for loanable funds? In particular, what would happen to U.S. interest rates, U.S. saving, and U.S. investment? b. What would happen in the market for foreign-currency exchange? In particular, what would happen to the value of the dollar and the U.S. trade balance?

Suppose that U.S. mutual funds suddenly decide to invest more in Canada. a. What happens to Canadian net capital outflow, Canadian saving, and Canadian domestic investment? b. What is the long-run effect on the Canadian capital stock? c. How will this change in the capital stock affect the Canadian labor market? Does this U.S. investment in Canada make Canadian workers better off or worse off? d. Do you think this will make U.S. workers better off or worse off? Can you think of any reason the impact on U.S. citizens generally may be different from the impact on U.S. workers?