A Japanese flour mill buys wheat from the United States and pays for it with pesos. Other things the same, Japanese

Question

Quizplus · Accepted Answer

Since the Japanese mill is buying wheat from the U.S. and paying with pesos, this means that there is an increase in demand for American exports (wheat). Thus, net exports will increase. However, the mill is paying for it with pesos, so there will be an increase in supply of pesos in the United States. This increase in the supply of pesos will result in a decrease in the exchange rate of pesos to dollars. As a result, U.S. net capital outflow will increase since there will be more assets flowing out of the U.S. to buy goods from abroad.

A Japanese Flour Mill Buys Wheat from the United States