Figure 6-1
-In the figure above, an increase in autonomous imports will cause the ________ dollars to ________ and the exchange rate to ________, ceteris paribus.

Question

Figure 6-1 
-In the figure above, an increase in autonomous imports will cause the ________ dollars to ________ and the exchange rate to ________, ceteris paribus.

Quizplus · Accepted Answer

An increase in autonomous imports will cause a decrease in supply of dollars in the foreign exchange market. This is because when imports increase, more dollars are demanded to pay for those imports, and this increases the demand for foreign currency (decreasing the supply of dollars). As a result, the supply curve will shift to the left from S0 to S1. Since the quantity of dollars demanded in the foreign exchange market has not changed, the decrease in supply will lead to an increase in the exchange rate (price of foreign currency in terms of dollars). Therefore, the correct answer is B: supply of; shift to S1; fall.

Figure 6-1 -In the Figure Above, an Increase in Autonomous Imports Will