Exchange Rate Effects on Trade

a. Explain why a stronger dollar could enlarge the U.S.

balance-of-trade deficit. Explain why a weaker dollar could affect the U.S. balance-of-trade deficit.

b. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this adjustment would occur.

c. Why does the exchange rate not always adjust to a current account deficit?