4. Analyzing the effects of a trade deficit

You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. agricultural industry is concerned about the level of fruit and vegetable imports to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a quota on imports would shrink the size of the trade deficit. The following exercise will help you to 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.

DemandSupplyREAL EXCHANGE RATE (Units of foreign currency per dollar)QUANTITY OF DOLLARSDemandSupply

Given this change, the dollardepreciates .

Fill in the following table with the effect of a quota on the following items:

	Supply of Loanable Funds	Real Interest Rate	Domestic Investment	Net Exports
Change due to a quota

You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. agricultural industry is concerned about the level of fruit and vegetable imports to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a quota on imports would shrink the size of the trade deficit. The following exercise will help you to 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. Supply O Demand Supply REAL EXCHANGE RATE (Units of foreign currency per dollar) Demand QUANTITY OF DOLLARSSupply O Demand Supply REAL EXCHANGE RATE (Units of foreign currency per dollar) Demand QUANTITY OF DOLLARS Given this change, the dollar depreciates Fill in the following table with the effect of a quota on the following items: Supply of Loanable Funds Real Interest Rate Domestic Investment Net Exports Change due to a quota