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Unformatted text preview: Our imports fall and exports rise as euro gets more expensive Market equilibrium occurs where demand for U.S. dollars equals supply Equilibrium implies a balance of payments The thing of horizontal access is the bottom of price. Government budget deficits lead to trade deficits Foreign currency flows in to lend to us. Foreign currency flows out to import. Balance of payments Euros per dollar * U.S. price per dollars = EU prices in terms of Euros in equilibrium. In the first term the dollars are canceling. So the left hand side is in Euros Imagine the left hand side is lower than the right hand side (you can send fewer euros to get shoes in the U.S. than in the EU)...
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- Fall '08