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Free response question

Macroeconomics · Hard · 40 marks

EO past paper: International Final, Part A

Section II (40 points). The four parts follow on from each other and concern a country that imposes tariffs on imported foreign goods.

(a)Explain in your own words what a tariff imposed on imported foreign goods is. List the microeconomic reasons why governments impose tariffs. Discuss the possible microeconomic consequences of implementing tariffs.[10](b)Now assume that the given country has a trade balance deficit. What are the possible reasons for the existence of this deficit?[10](c)Explain whether it is possible for the imposition of a tariff to eliminate this trade deficit in the medium term. What would be the impact on the country's exchange rate after imposing a tariff on foreign goods? Explain your answer in detail. Considering not only the direct effects of the tariff but also the subsequent impact on the exchange rate, what could be the final effect of the tariff on the trade balance in the long term? Explain your answer in detail.[10](d)Finally, assume that the country's central bank attempts to prevent the exchange rate from moving after the tariffs are imposed. What type of foreign exchange interventions will it conduct? What will be the impact on the country's money supply and subsequently on the price level? If the nominal exchange rate does not change, will the real exchange rate change after the price level moves? What will be the impact on the trade balance? Explain your answers in detail.[10]

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