Question

Question 2 - Short Run LOE and SOE - Protectionist Policy (30 points) Suppose that the US decides to impose a new round of protectionist policies (tariffs or quotas) on imported goods coming from China. Part I (15 points) - Use the Large Open Economy Model to explain what the short run effects would be on: (a) The U.S. IS and LM curves - draw the graphs (4 points) (b) The US net foreign investment, exchange rate, and net exports (4 points) (c) Draw the graphs representing the foreign exchange market and show the effect of this protectionist policy on them (4 points) (d) Explain why this policy is or not effective (3 points)

Answer 1

Part I rate of interest (a) rate of retun domestic I foreign LMO 2 Mo 151 150 - FX clive у У, Income CY) 0 (15-LM) Figl nate Hotel O right LM as E, E. Exchange (poux Market) (Fig2) Due to trade restertions , imports of us would fall. Since, Is cuve to depends upon net expats. Due to trade restrictions on impots Is cure would shift to the given. The interest rate lises and income llut also in clases (b.) As we can see in fig 2) due to a rise in domestic interest rates relative to facigu rates, there would huge capital Inflows which will drive down the exchange rate. The Us & would appuciate a result imports would become cheaper and exporters become costlien (in shat un). The net expects would fall.. Occu as (Auswerc) (Figure 2) upresents the graph of foreign exchange market Que to protectionist pelicles, the Us & would appreciate and exchange rate would fall I answerd) In ши Its net exports caused by long Is cuve would shift back to beginal position due to fall in appreciation of $. The policy is not effective because it be may give false impression of raising expects autailing impocs. As per flexible exchange markets with perfect capital mobility a capital inflows would offset the effect of Initial trade restuctions by $. This would cause is to shift back due to use in net imports. by afferiating the value of Scanned with CamScanner Scanned with CamScanner