Question
Suppose that the rest of the world goes through an economic recession. Using the foreign exchange...
Suppose that the rest of the world goes through an economic recession. Using the foreign exchange market show what this would do to the exchange rates and net exports from the U.S. perspective
Homework Answers
Answer #1
Ans. When the other countries
are going through recession, there income falls, so, demand for US
exports falls. This leads to decrease in net expots component in
USA.
Decrease in net exports leads to fall in demand for US dollar. This
shifts the demand curve for US exports leftwards from D to D'. This
at given supply of US dollar leads to depreciation of US dollar
decreasing exchange rate from e to e' and equilibrium quantity of
US dollar decreases from L to L'.
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