a) After bad experiences with a flexible exchange rate, the small open economy of Rivendell decides to fix it exchange rate. Suppose the economy of Rivendell has reached the long run equilibrium (i.e. full employment).Use the Mundell-Fleming model to explain what would happen to aggregate income, the real exchange rate, the nominal exchange rate, the real interest rate in this small open economy with a fixed exchange rate if the government implements a tariff on imported goods.
b) Is trade policy more effective under a flexible exchange rate than under a fixed exchange rate? Explaining your reasoning.