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The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit. on the other hand, some in the popular press have claimed that the increased trade deficit resulted from a decline in the quality of U.S. products relative to foreign products.
a. Assume that U.S. products did decline in relative quality during the 1980s. How did this affect net exports at any given exchange rate?
b. Draw a three-panel diagram to show the effect of this shift in net exports on the U.S. real exchange rate and trade balance.
c. Does a decline in the quality of U.S. products have any effect on our standard of living? (Hint: When we sell our goods to foreigners, what do we receive in return?

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