An article in USA Today (December 16, 2004)

began “President Bush said Wednesday that the White House will shore up the sliding dollar by working to cut record budget and trade deficits.”

a. According to the model in this chapter, would a reduction in the budget deficit reduce the trade deficit? Would it raise the value of the dollar? Explain.

b. Suppose that a reduction in the budget deficit made international investors more confident in the U.S. economy. How would this increase in confidence affect the value of the dollar? How would it affect the trade deficit?