Question: Assume that US imports have an income elasticity of 1.3 and a price elasticity of -0.5, and US exports have an income elasticity of 1.2 and a price elasticity of -0.7. They also have a ‘‘repercussion elasticity'' of 0.5, reflecting changes in GDP the previous year. To simplify matters, assume that both exports and imports are 10% of GDP. Determine what happens to the US trade balance this year and next when:
(A) An easier monetary policy boosts the growth rate by 1%.
(B) Export subsidies equal to 2% of total exports are granted.
(C) The US reduces the average tariff rate from 4% to 2.5%.
(D) US costs of production rise 2%, hence boosting export prices by that amount.
(E) An inflow of foreign saving boosts the value of the dollar by 8%.