Question

Assume that the American government decreases its quota on Japanese manufactured cars. Which of the following will occur, all else being equal?

A) The US BOT will decrease.
B) The Japanese BOT will decrease.
C) The US official reserve account will decrease.
D) The Japanese official reserve account will decrease.

Answer 1

Solution : The options A will occur

Reason :

• When the American government decreases its Quota on Japanese manufactured cars, the Imports to America will increase and the Balance of Trade decreases.

Balance of Trade = Total Value of a country's Exports - Total Value of a country's imports

When the Country's import's increases; BOT decreases.

Other choices B, C & D are incorrect for the below:

• While Japan exports more Japanese manufactured cars to US, Japanese BOT will increase.
• US official reserve account will increase in case of a trade surplus and decrease while there is a trade deficit. In the above case, we cannot comment on whether BOT is positive (Trade Surplus) or negative (Trade deficit) unless the actual total value of exports and imports are known.
• Similar is the case with the Japanese official reserve account.