The chapter notes that the rise in the U.S. trade deficit during the 1980s was due...

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.

1. This caused net exports at any given exchange rate to (decrease or increase)? .

2. Indicate the effect of this shift in net exports on the U.S. market for foreign exchange.

3. 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.

-The real exchange rate increases.

-The trade balance increases.

-Net capital outflow is unchanged.

4. True or False: The claim that some people made in the popular press is consistent with the model in this chapter.

5. True or False: The change in the real exchange rate that resulted from the decline in the quality of U.S. products may increase our standard of living.

Expert Solution

Rahul Sunny answered 2 years ago

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.

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