Suppose the U.S.economy is operating at full capacity and the dollar's exchange value depreciates.According to the absorption approach, the United States would have to accept reductions in domestic spending if the U.S.trade balance is to improve as a result of the depreciation.

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Under the absorption approach, a depreciation of the dollar would lead to an increase in net exports and a decrease in domestic spending. In order to improve the trade balance, the United States would have to accept reductions in domestic spending. However, if the economy is already operating at full capacity, it may not be possible to increase net exports without causing inflationary pressures.