If Corporate Downsizing and Lack of Job Security Cause Consumers

question 19

Essay

If corporate downsizing and lack of job security cause consumers to spend less and save more, what will be the impact on the exchange rate and trade balance? Use the long-run model of a small open economy to illustrate graphically the impact of this decline in consumer confidence on the exchange rate and the trade balance. Assume the country starts from a position of trade balance, i.e., exports equal imports. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of a decline in consumer confidence on the exchange rate and the U.S. trade balance.

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Definitions:

Functional Products

Goods designed primarily for their utility and performance rather than their aesthetic qualities.

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A characteristic of individuals who are driven by a strong desire to accomplish significant goals, often seeking out challenges and demonstrating persistence.

Services

Intangible activities or benefits provided by one party to another, often in exchange for payment.

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The achievement of a set goal, objective, or target, often measured by specific criteria such as profit, market share, or personal fulfilment.