Foreign Tariff on US Goods
The question
Assume the foreign exchange market for the US dollar is initially in equilibrium. The government of the fictional country of Norhavn imposes a steep tariff on goods produced in the United States, and households and firms in Norhavn buy far fewer American products as a result. Assume the United States takes no retaliatory action and that American purchases of foreign goods and assets are unchanged. Show the effect 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.
Foreign Tariff on US Goods: the worked answer
On the Foreign Exchange Market (USD) graph, Demand for dollars (D$) shifts left.
Why Demand for dollars (D$) shifts left
Buyers in Norhavn must obtain US dollars before they can pay for American-made goods, so their purchases are part of the demand for dollars in this market. The tariff raises the price of US goods in Norhavn and its buyers purchase fewer of them, so fewer dollars are wanted at every exchange rate and the demand for dollars shifts to the left. The prompt rules out US retaliation and holds American purchases of foreign goods and assets constant, so the supply of dollars stays put.
What happens to the equilibrium
The dollar depreciates and the equilibrium quantity of dollars traded decreases.
The mistake students make on this one
The most common wrong answer is shifting the supply of dollars left, because students memorize the US-tariff case as 'tariff means S$ left' and apply it without checking who imposed this one. Norhavn levied this tariff on American exports, so it changes what foreigners buy, and foreign buying is always the D$ side of the graph.
On exam day
For tariffs, answer two questions before drawing: who imposed it, and on whose goods. A tariff that shrinks US exports moves D$ left; a tariff that shrinks US imports moves S$ left, and the two produce opposite exchange rate outcomes.
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 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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