Question

2. Use the following information to analyze the supply and demand for British pounds   There are two types of imports, autos and everything else. Total import are just the sum of auto and non-auto imports. Assume that there are no purchases of foreign assets by either country.

                    Imports-non autos    Imports-autos     Exports

1.5                   575                           325                        1,500

1.4                   650                           350                         1,400

1.3                   725                          375                         1,300

1.2                   800                          400                         1,200

1.1                   875                          425                         1,100

1                      950                          450                          1,000

.9                   1,025                        475                            900

.8                   1,100                        500                            800

a. Sketch the supply and demand curves. What is the equilibrium exchange rate?

b. Suppose the U.S. places tariffs on British autos that reduce auto imports. The new import schedule for autos is as follows:

E_$/Pound           Imports-non autos    Imports-autos     Exports

1.5                   575                           125                        1,500

1.4                   650                           150                         1,400

1.3                   725                          175                         1,300

1.2                   800                          200                         1,200

1.1                   875                          225                         1,100

1                      950                         250                          1,000

.9                   1,025                        275                            900

.8                   1,100                       300                            800

i) What is the new equilibrium exchange rate?

ii) What effect does the tariff have on U.S. exports (give a numerical answer)?

iii) What effect does the tariff have on U.S. non-auto imports (give a numerical answer)?

iv) What effect does the tariff have on U.S. net exports (exports minus imports)?

Answer 1