Suppose that in the data, the trade deficit appears to be procyclical ( take this as a statement

of fact).

1. Define what is meant by:

(i) a country running a trade deficit;

(ii) the trade deficit exhibiting procyclical behavior.

2. Using the small open economy model studied in class (1pt), use a diagram to outline

a possible explanation for the procyclical behavior of the trade deficit. Make sure to

illustrate what is happening to the trade deficit on the diagram. Please include the diagram.

3. Provide a brief explanation to accompany your diagram that you uploaded in

question 2 above to detail the mechanism by which we are able to obtain a procyclical trade

deficit.