Question

If exports increase and imports decrease in the U.S., what happens to the trade deficit? Will this help or hurt the U.S.? In what ways is a bigger trade deficit a problem for the country? What good is the deficit? Hint: Use the currency market supply and demand to determine the exchange rate.

Answer 1

Here is the answer for this Question .AH

Increase in exports and decrease in imports in the United States will lead to increase in the net exports and thus improve the trade balance of the country and thus lead to decline in trade deficit of the country. This will help United States as the trade balance of the country will improve.

A bigger trade deficit of the country is a problem for the country as it leads to increase in the current account deficit of the country and thus leads to decline in investor sentiment of the country. This will lead to depriciation of the country's exchange rate and thus decline in foreign investment of the country. Deficit is good if the increased government expenditure is used to finance capital equipments and used as capital expenditure which will generate increase in total revenue later.