The exchange rate between the U.S. dollar and the euro is floating freely—both governments do not intervene in the market for each currency. Suppose the president of the United States decides to place tariffs on certain imports from Europe. He has also argued in many places that the dollar is too strong visá- vis other currencies and it should be weakened so that the United States regains some of its competitive advantage.

a. How will consumption change in the United States?

b. What will happen if the income rises in the United States?

c. How will a decline in the export of European goods impact the dollar-euro exchange rate?

d. Consider the effects of a tariff on European imports. How will the European Union respond to U.S. tariffs?