The exchange rate between the U.S. and Japan is floating, e.g. determined by the market. Suppose the U.S. government imposes import quotas on Japanese products. Answer the following questions:
a. The quotas increase spending on domestic products. How does this affect the U.S. macro economy? Explain.
b. What affect do the changes in the macro economy described by you in part a. have on the demand for U.S. imports from Japan? E.g. if the initial reduction in imports due to quota is 25 B, is the final reduction larger, smaller, or the same? Explain.
c. Explain what effect the quota will have on the demand for the yen and so the value of the yen relative price of the U.S. dollar. What does this change do to the U.S. demand for imports from Japan?