# Question

Suppose that the economy begins in a position of balanced trade. Use the model of the small open economy to predict what would happen to the trade balance, and the real exchange rate in response to each of the following events.

a. A fall in consumer confidence about the future induces consumers to spend less and save more

b. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars.

a. A fall in consumer confidence about the future induces consumers to spend less and save more

b. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars.

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