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 tariff 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 tariff.

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