The chapter notes that the rise in the u. s. trade deficit during the 1980s was due largely to the rise in the u. s. budget deficit. on the other hand, some in the popular press have claimed that the increased trade deficit resulted from a decline in the quality of u. s. products relative to foreign products.

assume that u. s. products did decline in relative quality during the 1980s.

this caused net exports at any given exchange rate to increase/decrease?

indicate the effect of this shift in net exports on the u. s. market for foreign exchange.

(draw a graph)

according to this model, which of the following statements are true as a result of the quality change? check all that apply.

there is no change in the real interest rate.

net capital outflow is unchanged.

there is no change in the trade balance.

the real exchange rate declines.

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