Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 32 - Part XI - A Macroeconomic Theory of the Open Economy - Problems and Applications - Page 703: 6

Answer

Please see the graph. The senator is wrong.

Work Step by Step

The export subsidy the senator is proposing would increase the quantity of exports. This increase would cause the demand curve for the exchange rate to shift to the right and increase the exchange rate. Additionally, the increased exchange rate increases imports and matches the quantity of exports from the subsidy. Thus, the imports and exports cancel each other out.
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