The government of a small open economy is considering the following policy changes. Evaluate them and show the expected outcomes (sketch graphs to help visualize the changes).
a) The trade minister wishes to restrict imports through quotas in order to protect local industries from international competition. How will this affect the exchange rate? The trade balance?
b) The trade minister decides to open up the economy to allow more imports. How will this affect the exchange rate? The trade balance?
c) What would be the effect of increased government spending? How would it affect the real interest rate? Savings? Net Export? How about the exchange rate?