Assume that there are exactly two countries: The United States and Australia. Also assume that these countries economies are closed (i.e. they do not trade or otherwise interact with each other) with one notable exception: The U.S. exports plastic to Australia, and Australia exports iron ore to the U.S. For this question, I will abbreviate the currency of the U.S. as USD and that of Australia as AUD.

a.Suppose that the U.S. imports 100,000 tons of iron at a price of 60 AUD per ton and exports 100,000 tons of plastic at a price of 55 USD per ton. If the exchange rate is 1 AUD = 1 USD, what is the U.S. trade balance in USD?

b.Suppose that the exchange rate changes to 1.1 USD = 1 AUD, and that prices in local currencies remain constant. What is the new price of iron in USD? What is the new price of plastic in AUD?

c.Suppose that the businesses that have made the orders leading to these import and export quantities are all locked in meaning they are contractually obligated to complete the trade. If the exchange rate changes as in part (b), what will be the trade balance of the United States in USD?

d.In the future, businesses will make different purchasing decisions. In reaction to this change in the exchange rate: What will happen to the quantity of iron demanded by the U.S? What will happen to the quantity of plastic demanded by Australia?

e.Compared to your answer in (c), what will happen to the trade balance of the U.S. under the new quantities described in (d)?f.Graph a curve that shows the general shape of what will happened to the trade balance over time. Your x-axis should be time, your y-axis should be $.