A If Corporate Downsizing and Lack of Job Security Cause

Essay

a. 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? Use 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 U.S. trade balance.