Suppose the U.S. imposes an import quota on steel. U.S. exports
A)increase, the real exchange rate of the U.S. dollar appreciates, and U.S. net capital outflow increases.
B)increase, the real exchange rate of the U.S. dollar depreciates, and U.S. net capital outflow is unchanged.
C)decrease, the real exchange rate of the U.S. dollar appreciates, and U.S. net capital outflow is unchanged.
D)decrease, the real exchange rate of the U.S. dollar depreciates, and U.S. net capital outflow decreases.

Question

Quizplus · Accepted Answer

When the U.S. imposes an import quota on steel, it reduces the supply of steel in the domestic market, causing the price of steel to increase, and consequently, reducing steel imports. This would decrease U.S. exports because the trading partners will reduce their imports from the U.S. in retaliation. As a result, the demand for U.S. dollars decreases causing the real exchange rate to appreciate, making U.S. exports more expensive for foreign buyers. However, there is no effect on net capital outflow as the quota policy does not directly affect the capital flows.