Suppose the U.S. government has just hired you to analyze the following scenario. Assume the U.S. automobile industry grows concerned about foreign manufacturers exporting fuel-efficient vehicles to the United States, a practice that harms domestic producers. Industry experts claim that implementing a quota on imports would reduce the size of the trade deficit. Complete the following exercise in order to help you analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the quota. REAL EXCHANGE RATE (Units of foreign currency per dollar) Supply QUANTITY OF DOLLARS Given this change, the dollar appreciates Change due to a quota D2 D1 Demand Supply Fill in the following table with the effect of a quota on the following items: Supply of Loanable Funds Real Interest Rate No change ▼ Increase ? National Saving Increase Net Exports Increase

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4. Analyzing the effects of a trade deficit
Suppose the U.S. government has just hired you to analyze the following scenario. Assume the U.S. automobile industry grows concerned about
foreign manufacturers exporting fuel-efficient vehicles to the United States, a practice that harms domestic producers. Industry experts claim that
implementing a quota on imports would reduce the size of the trade deficit. Complete the following exercise in order to help you analyze this claim.
The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market.
Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the quota.
REAL EXCHANGE RATE (Units of foreign currency per dollar)
Supply
QUANTITY OF DOLLARS
Given this change, the dollar appreciates
Change due to a quota
D2
D1
Demand
Supply
Fill in the following table with the effect of a quota on the following items:
Supply of Loanable Funds Real Interest Rate
No change
Increase
?
National Saving
Increase
Net Exports
Increase
Transcribed Image Text:4. Analyzing the effects of a trade deficit Suppose the U.S. government has just hired you to analyze the following scenario. Assume the U.S. automobile industry grows concerned about foreign manufacturers exporting fuel-efficient vehicles to the United States, a practice that harms domestic producers. Industry experts claim that implementing a quota on imports would reduce the size of the trade deficit. Complete the following exercise in order to help you analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the quota. REAL EXCHANGE RATE (Units of foreign currency per dollar) Supply QUANTITY OF DOLLARS Given this change, the dollar appreciates Change due to a quota D2 D1 Demand Supply Fill in the following table with the effect of a quota on the following items: Supply of Loanable Funds Real Interest Rate No change Increase ? National Saving Increase Net Exports Increase
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