Recessions often lead to calls for protectionist measures to preserve domestic jobs. Suppose that a country that is in a recession imposes restrictions that sharply reduce the amount of goods imported by the country.
Using the Keynesian AS-AD model, analyze the effects of import restrictions on the domestic country’s employment, output, and real exchange rate, keeping in mind that the country is initially in a recession.
What are the effects of the country’s action on foreign employment, output, and real exchange rate? What happens if the foreign country retaliates by imposing restrictions on goods exported by the domestic country?
Suppose that the domestic economy is at full employment when it imposes restrictions on imports. Using the basic classical model without misperceptions, find the effects on the country’s employment, output, and real exchange rate.