- If the US market has a high demand for exported goods, how does this affect the equilibrium exchange rate in the United States and what does the new graph look like?
The rate would go down and on the graph, the demand for dollars would go up.
The real exchange rate would have to go down if there was a higher demand for exported goods. When a foreign country purchases US made goods, they have to convert their money into US dollars in order to make the purchase. Because the demand for dollars goes up, and the supply of dollars into the Net Capital Outflow goes up, the NCO line would move to the right and there would be less of a supply of dollars for the NCO . The lowered real exchange rate gives the US dollar more buying power.
2. How does a higher defecit in the United States affect foreign trade?
There is a bigger deficit when the US has a higher interest rate and the exchange rate goes up.
When the deficit in the United States goes up, there is an increased demand for loanable funds but the supply is lower because the real interest rate increases. The higher interest rate then decreases the net capital outflow of money. This lowers the supply of money that can be exchanged into foreign dollars. Because of this, the foreign trade is lower.
3. When the US imposes an import quota, does this affect net exports?
No, it does not affect net exports.
When the US imposes an import quota, there is no affect on net exports because the only shift in supply and demand occurs in the market for foreign-currency exchange. The quota shifts the demand curve to the right because there is an increased demand for US dollars and the real exchange rate increases, but the net capital outflow and the real interest rate stay the same.
My Journey into Macroeconomics 