Question

1: what would happen to national saving, investment, trade balance interest rate, and real exchange rate in responding to an increase in tariff on imported cars by the domestic government?

graphically explain with the help of large open economy

2: what do you mean by trade policies? it's argued that protectionist trade policy benefits only local producers whereas society on the average suffers from it, do you agree with the statement? graphically explain considering a model of small open economy?

Answer 1

1

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. As government Increases tariffs ,the world price or imported car price increase.as its price increases its demand or import decrease and demand for domestic cars increases. And gdp Increases.

National saving is sum of private and public saving .as income increase private saving Increase and by tariff public saving Increase,so national saving Increase.

In EQUILIBRIUM investment is EQUALS to saving ,do Increase in savings leads to increase in. Investment

As import reduced and exports remain same , there is a positive change in trade balance.if it is in deficit ,then deficit will reduce,if in balance ,there will be surplus and if surplus,then surplus will increase.

As LM equation tells there is positive relation between income and interst rate.income Increase leads to interest rate increase and vice versa.

So Increase in income leafs to rise in interest rate given money supply is same.

As imports reduced, demand for foreign exchange or foreign currency decrease,so nominal exchange rate increases.as increase in tariff Increase price of foreign cars for domestic people.increase in domestic good demand and output leads price increases,

Real exchange rate,= nominal exchange rate*price of foreign car/price of domestic car

So real exchange rate increases,means currency value in terms nominal terms and in goods term Increases