Question

3. How will a decline in the GDP of the US affect the following a. US consumers' incomcs b. The amount of imports coming into the US? c. The supply of US dollars to the exchange markcts? d. The market value of the dollar in the exchange markets?

Answer 1

Decline in the gross domestic product (GDP) of the US will cause the consumers’ income in the US to decline. This is because the consumers or the households also act as the supplier of the factors of production in the production process. So, if total output is declining, then it will also result in decline in the compensation to the factors of production.

Decline in the gross domestic product (GDP) of the US will cause the amount of imports coming into the US to decline. This is because decline in the GDP will result in the fall in consumers’ income. With reduced income consumers will demand less of imported goods.

Decline in the gross domestic product (GDP) of the US will cause the supply of US dollars to the exchange markets to decrease. This is because decline in the GDP will result in decline in the interest rate. As a result, investors looking for profits will move out of the country in search for higher interest destination.

Decline in the gross domestic product (GDP) of the US will cause the market value of the dollar in the exchange market to depreciate. This is because a decline in the GDP signifies recession which means interest rates will fall. As a result, investors looking for profits will move out of the country in search for higher interest destination.