Question

14. Let's compare a tariff (tax on imports) to an increase in money supply in the short term, assuming that both depreciate the currency. How do they differ in effects on welfare? Why do many economists believe there are restrictions on countries ability to use tariffs to expand domestic output that are not present in the original model? 15. Why did Brazil replace its currency with a new version in 1994? Many economic theories would predict this would have no effect on outcomes. Explain why? From the Brazilian experience it does appear there was a change in expectations about future inflation. Why might the currency change have helped with this?

Answer 1

14.Simply put when an import tax is imposed the price of imported goods increases in the domestic market and therefore the consumers of the products suffer a reduction of welfare.The prices of the domestic substitutes too are likely to increase which in turn reduces consmers wel being.

For the producers of the substiutes of the imported good their wel being i.e. the producer surplus increases because both the price and the level output produced increases which might further increase both level of investment and employment. So the aggregate benefits can be considered.

But restriction on tarriff and an icrease in domestic production depends on many factors like availability of technology,price elasticities of the goods imported,income and cosumption pattern of the consumers,availability of labour and other factors for producing those goods domestically which are imported.

On the other hand increase in money supply increases consumer spending,increases aggregate demand for all goods and services,reduces the interest rates leading to higher level of investment and employmen ,larger levels of output and general economic welfare.