If a country impose tariffs on imports, how does this action change the long run real...
If a country impose tariffs on imports, how does this action change the long run real exchange rate? Please show this graphically. How is the long-run nominal exchange rate affected? Please assume that there are no changes in monetary conditions.
Homework Answers
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Answer:
If a country impose tariffs on imports, its decrease imports beacause imposing tariffs increase prices of imported goods increase.
Real exchange rate = Nominal exchange rate*(Domestic price/Foreign price)
When domestic price increase (all thing remaining the same) real exchange rate increase and vice-versa.
When imports decrease, its decrease supply of domestic currency that appreciate domestic currency. So, If a country impose tariffs on imports, its increase real exchange rate in the long-run.
Hypothetical Data:
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