If Corporate Downsizing and Lack of Job Security Cause Consumers

Essay

If corporate downsizing and lack of job security cause consumers to spend less and save more,what will be the impact on the exchange rate and trade balance?
a.Use the basic version of the long-run model of a small open economy to illustrate graphically the impact of this decline in consumer confidence on the exchange rate and the trade balance.Assume the country starts from a position of trade balance,i.e.,exports equal imports.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curves shift
v.the new long-run equilibrium values.b.Based on your graphical analysis,explain the predicted impact of a decline in consumer confidence on the exchange rate and the domestic economy's trade balance.