the answer
ECON 104 Homework 12 why
the trade deficit in the US
increased Answer
ECON 104 Homework 12 why the trade deficit in the US increased Answer
1) (20 points) Explain, in five sentences or less, exactly why the trade deficit in the US
increased from 1995 to 2000. There are two specific reasons. Make sure you explain
clearly (the intuition) why each reason would add to our trade deficit.
2) (40 points total)
a. (10 points) Suppose that you received your college degree from Penn State and nailed a
great job over in Europe in the summer of 2001. Given that your family remains in the US,
you make sure that you visit the family every November by traveling from Europe to the
US. We are going to compare the cost of this vacation, in terms of euros, during two
different periods: November 2002 and November 2012. We assume that the cost of the trip,
in terms of $ US, remains the same at $1,000 in both periods. Using the link below and
rounding down to two decimals, compare the euro cost of the trip in November 2002 vs. the
euro cost of the trip in November 2012.
See the St. Louis Federal Reserve site for $ per euro exchange rate (to get actual data click
on view data on left hand side of page)
b. (30 points 15 points for explanation and 15 points for correct and completely labeled
diagram) Using the same link above, we are now going to use our supply/demand
framework for US $ to model the movement in the euro per $ exchange rate between
December 2007 (the very beginning of the Great Recession) and November 2008 (pretty
much the height of the global financial crisis). Note that the data is in $ per euro so you
need to convert it into euro per dollar before proceeding. For example, $ 1.2 per euro is
converted by 1/1.2 = .833 meaning that $1 = .83 euro (this is the vertical axis on your
graph, i.e., euro per $). Rounding down again to two decimals, draw a supply and demand
diagram like we did numerous times in the lectures labeling the vertical axis as euro per $
and the initial supply and demand curves labeled with 12/07, Label this initial point as
point A.
Now explain what happened to each curve and WHY between 12/07 and 11/08. Label this
new point (11/08) as point B with your supply and demand curves labeled accordingly
(Hint: the two obvious facts during this period is that the 1) US was in a deep recession
and 2) we were at the height of the (global) financial crisis (in 11/08). Assume all else is
constant.