Suppose the U.S. economy is in a recession (employment level is below the full employment). Trump is accusing China of stealing jobs from the US by manipulating the currency. So, he decided to raise tariff on all of US's imports from China. Suppose the U.S. imports more Chinese goods than it exports to China. Assume China does not retaliate.

a. In the short run, how will the increased tariffs affect the AA and the DD curves in US? Assume there are only two countries: U.S. and China. Will the U.S dollar depreciate or appreciate, why? Will the output of U.S. increase or decrease?

b. Now assume China is in full employment, how the Chinese currency (RMB) and output will be affected? Discuss both the short-run and long-run impact.

c. Suppose Chinese government can only do monetary policy, what can the government do to change the output back to its original level? (Show it on a

graph). Discuss both the short-run and long-run impact.

d. Suppose Chinese government can only do fiscal policy, what can the government do to change the output back to its original level? (Show it on a graph);

e. Now 1 year after Trump's increased tariffs, the Wall Street Journal reported that US current account deficits have reached record high despite the tariffs. Why? Can US reduce its current accounts simply by imposing tariffs on China?

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