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Unformatted text preview: Suppose the dollar depreciates. The dollar price of shoes rises for American buyers while the price of aircraft falls for foreign buyers. Shoe imports fall and aircraft exports rise. However, since imports have become more expansive, their real value may rise even though the quantity of imports falls. If the change in the exchange rate causes a large change in the quantity of imports and exports, then net exports will rise. Typically, in the short run the quantity of imports and exports does not change much. So, net exports fall. After consumers and firms have had time to adjust their spending patterns, net exports will rise. Generally, the exchange rate and the trade balance move in opposite directions. So, a devaluation will cause national income to rise if 1. devaluation actually improve the trade balance 2. the terms of trade do not worsen so that import prices rise while export prices fall...
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.
- Fall '09
- Personal Finance