Final answer:
The correct answer is 1. Imposing an import quota on lumber likely causes the real exchange rate of the U.S. dollar to increase due to decreased demand for foreign currency and reduced supply of dollars in the foreign exchange market. Changes in trade policies and interest rates can significantly influence the exchange rate.
Step-by-step explanation:
When the United States imposes an import quota on lumber, it likely makes the real exchange rate of the U.S. dollar increase. An import quota reduces the supply of lumber entering the U.S. from foreign markets, leading to a decline in demand for foreign currency to pay for imports, thus causing an increased demand for the dollar as there are fewer dollars being exchanged for foreign currency. Additionally, the cost of imports might also rise, reducing the overall quantity of imports, which typically results in a higher real exchange rate for the dollar as the currency appreciates in value due to reduced supply in the foreign exchange market.
If we consider what happens when U.S. interest rates decline compared to the rest of the world, the likely impact would be a decrease in the demand for dollars internationally as investors seek higher returns in other markets. This could lead to an increased supply of dollars as capital flows out of the U.S. and into countries with higher interest rates, putting downward pressure on the exchange rate for dollars compared to other currencies like the euros. In either case, changes in interest rates or trade policies like import quotas can substantially affect the exchange rate.