Question

2. The government of a small open economy in the long run wishes to promote trade policies that will result in currency appreciation (increasing the real exchange rate). A) Would protectionist policies (higher tariffs and more quotas) or freer trade policies (tariff reductions and quota eliminations) be more effective in generating currency appreciation? B) Illustrate graphically the impact of the trade policy on the exchange rate of the small open economy. C) What will happen to the trade balance of the small open economy as a result of the trade policies? D) What will happen to the quantity of exports and imports as a result of the trade policies?

Answer 1