Question

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 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. 

This caused net exports at any given exchange rate to_______. 

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

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. 

• Net capital outflow decreases. 

• The trade balance decreases. 

• The real exchange rate declines. 

The claim that some people made in the popular press _______  consistent with the model in this chapter. 

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. 

Answer 1

1)Due to decrease in quality of products the demand for  U.S dollars will fall at any given exchange rate(because decrease in demand for US goods which results in decrease in demand for US dollars)

This caused the net exports at any given exchange rate :-  the exports of U.S will fall/decrease.

2)Answer :- Option (A,D) are correct.

i.e no change in real interest rate and net capital outflow unchanged.

(Because there is no change in the market for loanable funds , there is no change in the real interest rate. Since there is no change in the real interest rate, there is no change in net capital outflow)

3)The claim in the popular press is not consistent with the model in this chapter.

4)False,decline in the quality of goods reduces the standard of living because a fall in the rate of exchange fetches fewer foreign goods in exchange of the domestic goods.