Export Boom, Import Slump
The question
Assume the foreign exchange market for the US dollar is initially in equilibrium. A strong expansion in the fictional country of Marovia raises household incomes there, and Marovian households begin buying far more American-made goods. During the same period, a widely publicized campaign persuades many US households to switch from imported consumer goods to domestically produced ones. Show the effect of these two changes in the foreign exchange market for the US dollar, holding all else constant. Show the effect on the Foreign Exchange Market (USD) graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Export Boom, Import Slump: the worked answer
On the Foreign Exchange Market (USD) graph, Demand for dollars (D$) shifts right and Supply of dollars (S$) shifts left.
Why Demand for dollars (D$) shifts right and Supply of dollars (S$) shifts left
Marovian buyers must obtain US dollars before they can pay for American-made goods, so their extra purchases raise the quantity of dollars wanted at every exchange rate and the demand for dollars shifts right. Separately, Americans must exchange dollars for foreign currency to pay for imports, so when US households switch to domestically produced goods, fewer dollars are offered for sale at every exchange rate and the supply of dollars shifts left. Both shifts push the value of the dollar up, so the dollar definitely appreciates. The two shifts pull the quantity of dollars traded in opposite directions, so that quantity is indeterminate: it rises if the increase in demand is larger, falls if the decrease in supply is larger, and is unchanged if the two are equal in size.
What happens to the equilibrium
The dollar definitely appreciates, while the equilibrium quantity of dollars traded is indeterminate and depends on which of the two shifts is larger.
The mistake students make on this one
The most common error is claiming both outcomes are determinate, usually writing that the dollar appreciates and the quantity of dollars traded falls because the drop in import buying is the change students notice first. Nothing in the stem says which shift is bigger, so only the exchange rate can be signed, and any confident claim about the quantity traded loses the point.
On exam day
On a two-shift foreign exchange question, sign the exchange rate and the quantity separately: the variable both curves push the same way is your determinate answer, and write the word indeterminate for the other instead of guessing.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Demand for dollars (D$) shifts right and Supply of dollars (S$) shifts left and every other curve on the Foreign Exchange Market (USD) graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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