Legislators often call for protectionist measures to preserve domestic employment. The purpose of this question is to evaluate the wisdom of legislation passed by domestic legislators, the purpose of which is to reduce domestic imports.
a. Assuming flexible exchange rates, and assuming a fixed price level, what are the effects of the import restrictions on domestic output, the real exchange rate, exports, imports, and net exports in the short run?
b. How is your answer to part (a) affected by allowing the domestic price level to adjust?
c. Assuming fixed exchange rates now, and assuming a fixed price level, what are the effects of the import restrictions on domestic output, the real exchange rate, exports, imports, and net exports?
d. How is your answer to part (c) affected when you allow the domestic price level to adjust?