ECN 101 Lecture Notes - Lecture 25: Trade Restriction, Money Supply, Import Quota
Document Summary
Effect of trade policy on floating exchange rates. Suppose that the government reduces the demand for imported goods by imposing an import quota or a tariff. Because net export equals export minus import, a reduction in imports means an increase in net that is , the net export schedule shift to the right . This shift in the net export schedule increases planned expenditure and thus moves the is curve to the right . Lm curve is vertical, the trade restriction raises the exchange rare but does not income. Often a stated goal of policies to restrict trade to alter the trade balances nx. Such policies do not necessarily have that effect. The same conclusion holds in the mundell- fleming model under floating exchange rates. Because a trade restriction does not effects income , consumption , investment or government s purchases , it does not affects the trade balance.
