Question

4. Imported goods from China into the U.S. have historically been very attractive to U.S. consumers. With a 20 percent tariff (tax) on Chinese goods into the U.S. and a Chinese government response the future flow of goods is uncertain.

a. Explain in macroeconomic terms what effects the U.S. tariff/tax (alone) is expected to have in China on its GDP and inflation in 2018.

b. Explain in macroeconomic terms what effects the combined U.S. actions and responses from China will have on GDP and inflation in the United States in 2018.

Answer 1

4.a) After imposing the tariff on Chinese goods, import of Chinese goods become costly for US consumers. So the demand from China will be decreased. China will lose income from export. So GDP of China will be reduced by this step. The unemployment rate will be increased and inflation will be decreased.

b) As now the US reduces import from China so net export( export-import) will be increased. This increases US GDP. Demand for domestic goods will be increased so the price will increase and thus inflation will be increased.