Question

Assume that the world consists only of the United States and Germany and that trade between them is balanced, so that neither country runs a trade deficit or surplus. If the euro falls in value relative to the U.S. dollar, with all else remaining unchanged, what will occur?

U.S. exports to Germany will ______, and U.S. imports from Germany will ______. These changes in trade will cause net exports (NX) in the United States to ______. The United States would begin to run a trade _____ and experience an _______ in net foreign investment. U.S. saving will be ______ domestic investment.

Answer bank:

equal to	investment	less than	saving	deficit
not change	surplus	increase	decrease	greater than

Answer 1

U.S. exports to Germany will "decrease", and U.S. imports from Germany will "increase". These changes in trade will cause net exports (NX) in the United States to "decrease". The United States would begin to run a trade "deficit" and experience an "increase" in net foreign investment. U.S. saving will be "less than" domestic investment.