If the U.S. government imposes an import quota on French wine, U.S. net exports will
A)increase, the real exchange rate of the dollar will appreciate, and domestic sales of U.S. wine will increase.
B)not change, the real exchange rate of the dollar will appreciate, and domestic sales of U.S. wine will increase.
C)not change, the dollar will depreciate, and domestic sales of U.S. wine will not change.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

Since an import quota on French wine will decrease imports of French wine into the U.S., there will be no change in U.S. net exports. However, with a decrease in supply of French wine, the equilibrium price of French wine in the U.S. will increase, causing a shift in demand towards domestic wines. This will cause an increase in domestic sales of U.S. wine. The real exchange rate of the dollar will appreciate because the demand for dollars will increase as U.S. consumers shift their purchases towards domestic goods.

If the US Government Imposes an Import Quota on French Wine, U