RQ_Solution_Ch_17 - ECMC61 Chapter 17 Review Questions...

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ECMC61 – Chapter 17 Review Questions Answer Key Question 1: Problem #2 Suppose the government imposes a tariff on all imports: A tariff is a tax on the consumption of imports an imposition of tariff will increase the demand for domestic goods because the prices of imports increase. This leads to higher aggregate demand If the imposition of tariff is temporary: Tariff AD DD shifts to the right to DD(AD 1 ). Since the tariff is temporary, there is no change in expectation, i.e., E e remains unchanged. Point B is the short-run equilibrium: Y to Y 1 E = E 1 (DC appreciates ) Overall, CA (the initial in CA due to the import tariff is only partially offset by the in CA due to real appreciation of DC) If the imposition of tariff is permanent: Tariff AD DD shifts to the right to DD(AD 1 ). Since the tax relief is permanent, agents expects DC to appreciates, i.e., E e decreases from, E e,0 to E e,1 . An expected appreciation of DC shifts AA schedule shifts downward to AA(E e,1 ). Point C is the short-run equilibrium: Y = Y FE (no change) E = E 2 ( DC appreciates ) Overall CA does not change (the initial in CA due to the import tariff is fully offset by the in CA due to real appreciation of DC) E DD(AD 0 ) DD(AD 1 ) A E 0 E 1 B E 2 C AA(E e,1 ) AA(E e,0 ) Y Y FE Y 1 1
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Question 2: Problems #4 Suppose there is a permanent decrease in a country’s aggregate demand: A fall in AD will shift the DD curve to the left from DD(AD 0 ) to DD(AD 1 ).
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This note was uploaded on 12/21/2011 for the course ECONOMICS ECMC61 taught by Professor Dr.irisau during the Fall '11 term at University of Toronto- Toronto.

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RQ_Solution_Ch_17 - ECMC61 Chapter 17 Review Questions...

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