Question

How does trade policy (imposing tariffs on imported goods) affect r, CF, e, NX, and Y in the short-run, under floating exchange rates in a large open economy? (Ch. 13)

Answer 1

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Question:

Answer:

A tariff is a tax levied on an imported good. The objective of tariff is to protect the domestic producers, increasing government revenue and control and stabilizing net export ane exchange rate.

When a government impose tariff on the imported goods then its negatively affect the price of goods in the domestic market in the short-run. Imposing tariff increase price level of goods in the domestic market. The short-run effects of tariff on a country depend on the flexibility of their economies and the macroeconomic tools available to fight with an economic shock., exchange rate flexibility, fiscal policy, and an independent central bank. But in the short-run imposing tariff increase price level and its decrease demand for goods. Decreasing demand for goods decrease the supply of domestic currency and the currency get appreciated. Decreasing demand in the economy decrease AD and decreasing AD decrease output and price level. Decreasing output level and decreasing price level discourage the investment or investors. To replace these imported goods the government focus on increasing investment and investment is increase when prices increase and prices increase when consumption increase. So, the government decrease interest to increase consumption and investment. When interest rate decrease its increase AD and increasing AD increase price and output level. But decreasing interest rate discourage to the foreign investors and its increase capital outflow and negatively affect to the net capital outflow. Other side appreciated domestic currency negatively affect to the export level and its decreasing. Decreasing export decrease net export (NX).

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