Case / Fair - Chapter 35 -2-4

Chapter 35 -2-4

This is a guidance answer ... your actual answer during the exam should be longer than this answer ...

2.     (a)    Answers can include, an increase in British interest rates, a decrease in U.S. interest rates, a decrease in the British price level, and an increase in the U.S. price level.

        (b)    All of the above would also cause the supply curve to shift left.

        (c)    The two changes in interest rates listed in (a) above (which would raise the value of the pound without any other simultaneous change in import or export demand) would make British goods relatively more expensive and decrease Britain’s trade balances (shrink the surplus or increase the deficit).

4.     (a)    The consumption function does not change so instead of spending their money on Japanese goods, U.S. citizens will spend it on domestic goods. All else equal, this will stimulate U.S. output and decrease U.S. unemployment, and decrease output and employment in Japan.

        (b)    If income rises, consumers are likely to buy more imports as well as more domestic goods. Imports from Japan will increase somewhat after the initial decrease.

        (c)    If imports decrease, then the demand for yen will also decrease because importers will not need as many yen to purchase Japanese goods.

        (d)    The yen will depreciate and the dollar will appreciate. This gives U.S. consumers more buying power in the market for foreign goods. Consumers will buy more imports, causing a decrease in aggregate expenditure on domestic output. Output and employment in the United States will fall. The current account deficit will rise, but the total balance of payments will still sum to zero.

        (e)    The quota would have to increase U.S. output and employment, at least in the short run. The increase in the U.S. trade balance increases U.S. output and employment. This causes the dollar to appreciate, which works to decrease output.

Courtesy of Case/Fair/Oster, 11th edition, 2014