Question

Suppose the United States decides to reduce export subsidies on U.S. agricultural products, but it does not decrease taxes or increase any other government spending.

Initially, a reduction in export subsidies decreases net exports at any given real exchange rate, causing the demand for dollars in the foreign exchange market to decrease. This leads to a decrease in the real exchange rate, which, in turn, decreases imports to negate any decrease in exports, leaving the equilibrium quantity of net exports and the trade deficit unchanged at this point.

1. However, the reduction in expenditure on export subsidies (Increases/Decreases) the fiscal deficit, thereby (Increasing/Decreasing) public saving.

2. Indicate the effect this has on the U.S. market for loanable funds. (Supply and demand shift?)

3. Given the change in the real interest rate, show the effect this has on net capital outflow.

4. This causes the supply of dollars in the foreign exchange market to (Increase/Decrease), the real exchange rate to (Rise/Fall) , and the equilibrium level of net exports to (Rise/Fall).

Answer 1