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    A trade deficit

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    A firm developed the following national economic projections for the coming year:
    Exports totaled to $648B, and imports totaled to $852B. Capital outflows totaled to $384 and capital inflows totaled to $504. During the year it appears that these projections are quite accurate.

    (a) Discuss what will eventually happen to the value of the dollar on the foreign exchange market.

    (b) Provided that there is pressure on the dollar to move in the direction you discussed in part (a), what actions should policymakers from a fiscal and monetary perspective take to offset this pressure in order to keep the foreign exchange value of the dollar stable?

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    Solution Preview

    A trade deficit places pressure on the dollar to depreciate, while capital inflows in excess of outflows place pressure on the dollar to appreciate. However, the trade deficit of $204 is greater than the excess capital ...

    Solution Summary

    A trade deficit effects are exemplified.