Question

1. Use the GDP=C+I+G+(X-M) model to answer the following questions: a. Suppose a small country is upset about its negative trade balance and decides to impose tariffs on foreign steel and aluminum. The tariffs decrease imports by $95 million and raise $30 million in taxes, which the government immediately spends on infrastructure. If the tariffs have no effect on anything else, what is the net gain or loss these tariffs would make to the country's GDP? b. Now suppose in a much more likely situation that these tariffs also reduce consumption by $40 million, investment by 31 million, and exports by $92 million. what would be the net gain or loss to GDP in this case?

Answer 1