Homework Answers
There is a small open economy that has raised tariff on imports from China. This increases net exports and so in the graph below, the NX curve shifts up. However the nation is a small open economy so it cannot change world interest rate or investment.
Hence, real exchange rate rises and currency appreciates. When the market settles, there is no change in saving or investment as well as on the real interest rate. Trade balance first increases but then decreases as real exchange rate is appreciated.
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