Long question I (20 marks)

6. Background: starting from March 2018, trade conflicts happen between U.S. and China. Import tariff is one of the main instrument used.

6.1 Use the DD-AA model for small open economy, and assume that U.S. is in its long-run equilibrium. Suppose the U.S. government imposes a tariff on all imports, analyze the effects this measure would have on the economy. Analyze both temporary and permanent tariffs. (8 marks)

6.2. Suppose there is a small open economy, who implements fixed exchange rates against USD and export intensively to U.S. market. (8 marks)

a) Use the DD-AA model analyze the output and balance of payments effects of an import tariff under fixed exchange rates

b) What would happen if all countries in the world simultaneously tried to improve employment and the balance of payments by imposing tariffs?

6.3 With macroeconomics-interdependence among large economies, what would be the consequence once a large country implements import tariff? (4 marks)