Question

Consider the long-run model of a small open economy which starts from a position of trade balance, i.e., exports equal imports. Suppose that corporate downsizing and lack of job security cause consumers to spend less and save more. Predict the impact of a decline in consumer confidence on the exchange rate and the U.S. trade balance.

Answer 1

In the event that corporate scaling down and absence of employer stability makes customer's certainty to decay and accordingly lessens the spending and builds sparing in the economy. Individuals will spend less on utilization in this way imports will lessen. This will lessen the interest of remote cash.

Effect of this decrease in customer certainty on the conversion scale would be that it would move for local cash.

Because of fall in imports, the trade balance would likewise improve.