Tariff on Imported Goods
The question
Assume the foreign exchange market for the US dollar is initially in equilibrium. The United States imposes a steep new tariff on goods made in the fictional country of Verdania, and US households and firms sharply cut back the volume of Verdanian goods they buy. Assume Verdania takes no retaliatory action and that foreign purchases of US goods and assets are unchanged. Show the effect of this change 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.
Tariff on Imported Goods: the worked answer
On the Foreign Exchange Market (USD) graph, Supply of dollars (S$) shifts left.
Why Supply of dollars (S$) shifts left
To pay for Verdanian goods, Americans must first exchange dollars for Verdanian currency, so US import buying is the source of the supply of dollars in this market. The tariff raises the price Americans pay for those goods and they buy fewer of them, so fewer dollars are offered in exchange for foreign currency at every exchange rate and the supply of dollars shifts to the left. The prompt rules out retaliation and holds foreign purchases of US goods and assets constant, so the demand for dollars does not move.
What happens to the equilibrium
The dollar appreciates and the equilibrium quantity of dollars traded decreases.
The mistake students make on this one
The most common wrong answer is shifting the demand for dollars right, because Americans are now buying more US-made goods instead of Verdanian ones. An American buying an American good pays in dollars and converts no currency at all, so that substitution never touches this graph; the whole effect runs through Americans needing less Verdanian currency, which is a decrease in the supply of dollars.
On exam day
For any tariff question, settle two things before you draw: who levied it, and on whose goods. A US tariff changes what Americans buy, so it moves S$; only a foreign tariff on US exports touches D$.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when 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.
More Foreign Exchange Market (USD) scenarios
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