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Lecture 17

ECON 402 Lecture Notes - Lecture 17: Fiscal Policy, Trade Restriction, Exchange RatePremium

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ECON 402
Maciej Dudek

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Lessons about trade policy
1. Import restriction cannot reduce a trade deficit
2. Even if NX unchanged, there is less trade:
a. Trade restriction reduce imports
b. Exchange rate appreciation reduces exports
3. Less trade results fewer gains
4. Import restriction on certain products may save jobs in certain domestic
industry but in the meantime destroy jobs in export-producing sectors.
5. Import restriction can not increase total employment
6. Import restriction create sectoral shifts
7. Import restrictions cause frictional unemployment
Fixed exchange rates
1. central bank stands ready to buy and sell the domestic currency for foreign
currency at predetermined rate
2. In MF model, the central bank shifts the LM curve as require to keep e its
3. In long run
a. Fixes nominal exchange rate
b. Real exchange rate can move
Fiscal policy
Floating rates:
Fiscal policy is ineffective at changing output
Fixed rate:
Fiscal policy is very effective at changing output
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