Question 1
Initially trade between the United States and Canada is balanced. Then, if a change in the exchange rate reduces the U.S. dollar price of Canadian goods,
ceteris paribus, we would expect
◦ a trade surplus in the United States.
◦ a trade surplus in Canada.
◦ a trade deficit in Canada.
◦ a trade deficit in both countries.
Question 2
Suppose that the United States and Italy both produce wine and shoes. In the United States, wine sells for $10 a bottle and shoes sell for $40 a pair. In Italy, wine sells for 15 euros a bottle and shoes sell for 20 euros a pair. If the current exchange rate is 0.8 euro to the dollar, then
◦ Italy will import both shoes and wine from the United States.
◦ the United States will import both shoes and wine from Italy.
◦ the United States will import shoes from Italy and Italy will import wine from the United States.
◦ the United States will import wine from Italy and Italy will import shoes from the United States.
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