Use the word labels to fill the blanks and complete the sentences below. Not all of the words will be used, but all the blanks should be filled.

Assume the world has only the U.S. and Germany, and that trade between them is balanced such that neither runs a trade deficit nor surplus. If exchange rates now change such that the U.S. dollar becomes more expensive for Germans to buy (and all else remains the same), we would expect:

U.S. exports to Germany will____ , and U.S. imports from Germany will ____. These changes in trade will cause net exports (NX) in the U.S. to______ . The U.S would begin to run a trade ______ and experience a net capital_____ . U.S. savings will be _______domestic investment.

Word Bank:

increase greater than surplus outflow

decrease less than deficit

not change equal to inflow