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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

A senator renounces his past support for protectionism: “The U.S. trade deficit must be reduced, but import quotas only annoy our trading partners. If we subsidize U.S. exports instead, we can reduce the deficit by increasing our competitiveness.” Using a three-panel diagram, show the effect of an export subsidy on net exports and the real exchange rate. Do you agree with the senator?

To determine

The impact of subsidy on net exports and real exchange rate.

Explanation

When the value of the total imports of the economy is subtracted from the total value of exports of the economy, the value of the net exports of the economy can be obtained. When the total value of imports is higher than that of the exports, it is known as the trade deficit; when the total value of imports is lower than that of the exports, it is known as trade surplus.

When the government provides export subsidies to the export-oriented productions, it helps the producers to market their products at lower prices in the international market. Thus, the subsidy helps to increase the net exports at any given real exchange rate. When the net exports increases, it will increase the demand for the US dollars in the currency exchange market, which will shift the demand curve towards the right...

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