Question

Suppose that Japan imposes an anti-dumping tariff on imports of Chinese solar panels. Given that this will decrease Japanese imports of those goods.

a) Comment on the effect on the Japanese IS curve.

b) Show the answer using a graph.

Answer 1

a) Fall in import will increase Japan’s net export because net export is the difference between export and import. Also, this will shift the IS curve to the right because net export is the component of IS curve and with the rise in net export, IS curve shift rightward.

a) Following graph shows, shift in IS curve:

The economy is initially at equilibrium at point A with interest rate (i) and GDP level of Y. With the fall in import or rise in net export IS curve shift from IS to IS1 and economy will achieve new equilibrium at higher interest rate (i1) and higher GDP (Y1).