Question

Recent trade tensions between the US and China have cooled off and the import quota on Chinese goods has been eliminated.

Use the Loanable Funds model, net capital outflow (NCO), and the Foreign-Currency Exchange market diagrams to determine how this policy change would affect (in order)

• the real interest rate: _________ (decrease/increase/no change)

• net capital outflow: __________(decrease/increase/no change)

• the real exchange rate: ___________(decrease/increase/no change)

• net exports: ___________(decrease/increase/no change)

Answer 1

If import quota has been uplifted then imports will increase and this implies that net exports will decline. However, this is not likely to influence the amount of trade as the exchange rate would suddenly depreciate so that there will be no change in net exports. Loanable funds market and capital market exhibit no change.

• the real interest rate: _________ no change

• net capital outflow: __________no change

• the real exchange rate: ___________decrease

• net exports: ___________no change