In this question, we will explore the Real Exchange Rate Approach to exchange rates. We define the real exchange rate as the relative value of representative domestic goods with respect to representative foreign goods. We also approximate this concept with the equation q = E Pt t tPt where q is the real exchange rate, E is the nominal exchange rate, P is the aggregate price level of the foreign economy, and P is the domestic aggregate price level. (a) (1 point) One of the assumptions of the previous equation is that there are no barriers to entry. Taxes and tariffs are one type of these barriers. Imagine that the foreign economy decides to tax exporters with an ad valorem tax 1. What would happen with the real exchange rate? Explain (b) (1 point) Plots this new equilibrium in an RS-RD diagram, which curve moves? Explain (c) (2 points) What would happen with the nominal exchange rate in the long run if this policy is permanent? Explain