Hi, I need to know the answer to these questions for an upcoming final. Please s

Question

Hi, I need to know the answer to these questions for an upcoming final. Please show your work. I have to photos attached because the question was on separate pages, but both photos are still related to the same question.

tu aujust? en economies are subject to the whims of for- islators when they choose to use protectionist 4. U eign leges to protect e es to protect employment in their countries. i urpose of this question is to evaluate the eco- mic effects of legislation passed by foreign legisla- tors. Assume that legislators in Country B pass legislation designed to restrict the size of imports ra from Country A.

Explanation / Answer

Restriction on size of imports from Country A

a) Flexible rates and a Fixed price level

Effects of import restrictions on output

Import restrictions in the country may lead to an increase in production. This leads to lower consumption in both the countries. Inflation will not change even as the money supply reduces. Wages increase in country B. The real exchange rate will depend on the nominal exchange rate.

Exports

As exports from the country B and imports into the country A increase, consumption increases. The domestic industry may suffer. In some sectors, unemployment may increase.

Net exports in country A

Net exports in country A equal exports minus imports. This would mean the country has a trade deficit and the deficit continues to increase.

With import restrictions, the real exchange rate will decrease. This is because the country will not be able to afford as many goods from country B for a certain sum.

(b) If the domestic price levels adjust, the real exchange rate will decrease as inflation increases. Inflation increases when a country exports more and wages increases. This is because if the production is not high and the consumption increases, inflation increases. If the production also increases real exchange rate will not change as much.

c) Fixed exchange rate and Fixed price level

Inflation number does not change; import restrictions on output in country B will lead to the trade deficit decreasing. Domestic industry will get a boost. Substitutes will be bought by the consumer. The real exchange rate will decrease for country A as the country will not be able to get the goods basket as earlier from country A.

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