Question

Once in office President Trump placed tariffs on the imports from China. Using the model of the Open economy, how would this policy affect the U.S. trade deficit? How would it affect the Exchange rate? Who would he hurt by such a policy? Who would benefit?

Answer 1

Imposing tariffs on the imports from China by USA would cause trade tranctions between the two country's to fall.

As a cause of this, US trade deficit would improve as with high tariffs the prices of the goods impoted before will now become expensives or dearer, and hence their demand would fall. Consequently, the demand for yuan would fall.

The exchange would be affected by the demand for international currencies in the open market. High tarrifs would reduce the demand for yuan would fall and hence value for dollars would rise.

This policy would hurt China badly as its production would not find an efficient market for earning profits. US would be affected less