Principles of Economics- Mankiw (5th) 669

Principles of Economics- Mankiw (5th) 669 - Figure 30-6 T...

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CHAPTER 30 A MACROECONOMIC THEORY OF THE OPEN ECONOMY 691 due to the import quota. In the end, an import quota reduces both imports and exports, but net exports (exports minus imports) are unchanged. We have thus come to a surprising implication: Trade policies do not affect the trade balance. That is, policies that directly influence exports or imports do not alter (a) The Market for Loanable Funds (b) Net Foreign Investment Real Interest Rate Real Interest Rate (c) The Market for Foreign-Currency Exchange Quantity of Dollars Quantity of Loanable Funds Net Foreign Investment Real Exchange Rate r 1 1 Supply Supply Demand NFI D 2 1 3. Net exports, however, remain the same. 2. . . . and causes the real exchange rate to appreciate. E 1 2 1. An import quota increases the demand for dollars . . .
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Unformatted text preview: Figure 30-6 T HE E FFECTS OF AN I MPORT Q UOTA . When the U.S. government imposes a quota on the import of Japanese cars, nothing happens in the market for loanable funds in panel (a) or to net foreign investment in panel (b). The only effect is a rise in net exports (exports minus imports) for any given real exchange rate. As a result, the demand for dollars in the market for foreign-currency exchange rises, as shown by the shift from D 1 to D 2 in panel (c). This increase in the demand for dollars causes the value of the dollar to appreciate from E 1 to E 2 . This appreciation of the dollar tends to reduce net exports, offsetting the direct effect of the import quota on the trade balance....
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