Compare the Effects of an Import Quota on Output Under

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The Answer is a.The import quota leads to a fall in imports. Because net exports equal exports minus imports, net exports increase, shifting the IS curve to the right. Since the LM curve is vertical, the exchange rate appreciates, but output remains unchanged.
b.The import quota leads to a fall in imports. Because net exports equal exports minus imports, net exports increase, shifting the IS curve to the right, leading to an increase in the interest rates and, hence, putting pressure on the exchange rate to appreciate. To keep the exchange rate fixed, the central bank has to increase the money supply causing a rightward shift in the LM curve and an increase in output.

Compare the Effects of an Import Quota on Output Under

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Compare the Effects of an Import Quota on Output Under

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Correct Answer:
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