1. Use the model of the small open economy to predict what would happen to the trade balance, the real exchange rate, and the nominal exchange rate in response to each of the following events. a. A fall in consumer confidence about the future induces consumers to spend less and save more. b. A tax reform increases the incentive for businesses to build new factories. c. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars. d. The central bank doubles the money supply. e. New regulations restricting the use of credit cards increase the demand for money.

Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter23: The International Trade And Capital Flows
Section: Chapter Questions
Problem 2SCQ: If the trade deficit of the United States increases, how is the current account balance affected?
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1. Use the model of the small open economy to predict what would happen to the trade balance, the real exchange rate, and the nominal exchange rate in response to each of the following events.

a. A fall in consumer confidence about the future induces consumers to spend less and save more.

b. A tax reform increases the incentive for businesses to build new factories.

c. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars.

d. The central bank doubles the money supply. e. New regulations restricting the use of credit cards increase the demand for money.

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