Question

Problem 3. Protectionism. Consider an open economy experiencing a trade deficit. The current president desires to elimitate the trade deficit. The president considers three policies: Policy 1: Impose restrictions on imports (such as quotas). Policy 2: Provide domestic exporters with simplified regulation to incentiveze them to export more. Policy 3: Provide domestic exporters with subsidies to incentivize them to export more. The program costs a substantial amount of money to the government (assume the expenses on the program are part of government spending) (A) Using the model of an open economy in the long run, analyze whether each of the policies will achieve the goal. To answer the question, for each policy draw three diagrams (the loanable funds market, the CF curve, and the foreign exchange market). Explain all changes and transitions in plain English, using economic logic. (B) Propose another policy that would eliminate the trade deficit. Using the diagrams listed in part A, show how this policy would work. Explain all changes and transitions in plain English, using economic logic.

Answer 1

Auswer . savings, tas feither es the equil buen interest ed net foncigu cyf - Gout imporets breduces national Savings, duces supply of loans and revises the equilit - This ecesults in fall in domestic and net fouers investment. The net foreign investueul ereduce dollars which in twem increases the exchange to trade belauce falls . Market of loomble funds neil ereduces supply of e exchange rate and wet foueipu Iwwestuut ? heel inteur e ItNFI hown S, I+Nfl et NFI(M) foreign investment NFJ Market for foreign exchange. & Real exchange rate - 'nx() net expouts NX policy z - increase in demand of exports does not affect louable funds as interest rate remain the samr. and Net foreizu investment lemain the same. If net export shifts it causes exchange wote to appreciate which depresses expouts and stimulates imports and does not affect the trade balance Ur MEI (M) Keel Interest Meks Net foreign inustaka ItNFI haus S, I+NfI turi XNfI Geal exchange rate. Scanned with CamScanner N NXCE) ist Poput Ņx

olicy 3 - The Government investment results in fall in demand for wans, equilibriu interest leate falls. Increase in net foueige inwesluveil.NFI lises results in exchange rate depreciates and net expouts uises. рея/ .fшиглаб, (ر) رارا INS Loan SI, auf wet frierge inusture i Real exchange unter Nxes xet export Nx Policy peoposed for increasing trade belance. policy → Increase in savings increase supply of lous and lowers equilibriva intruest eate. This lusults in increase in .. domestic and net tweign investment. Hence the exchange rete depreciates and trade balouce rises. Real Interest rate I INFI INFILM) - NFI + foreigurwestinien Laus s, it NFI RUX (E) NX Net expouts Scanned with CamScanner