Suppose the U.S. imposes import restrictions on Japanese cars. What is

Suppose the U.S. imposes import restrictions on Japanese cars. What is likely to happen to the U.S. current-account deficit?

What will be an ideal response?

ANSWER

Answer: Nothing will happen to the U.S. current account deficit, unless the import restrictions cause a change in savings or investment behavior. Absent these changes, which are unlikely, reduced U.S. imports of Japanese cars will lower the U.S. demand for yen, which will lead to a rise in the dollar’s value. The appreciating dollar will make U.S. exports less competitive and other foreign imports more attractive. The net result is that a reduction in U.S. imports of Japanese cars is balanced by reduced U.S. exports of goods and services and increased U.S. non-steel imports.