In a system of freely floating exchange rates and perfect capital mobility, an increase in tariffs on foreign goods will result in
A)an increase in domestic interest rates in the short run
B)an increase in the value of the domestic currency in the short run
C)an increase in the value of the domestic currency in the long run
D)no change in domestic interest rates or income in the long run
E)all of the above

Question

Quizplus · Accepted Answer

In a system with freely floating exchange rates and perfect capital mobility, an increase in tariffs on foreign goods can lead to an increase in domestic interest rates in the short run as the economy adjusts. This can also cause an increase in the value of the domestic currency both in the short and long run due to changes in trade balances and capital flows. Over time, the economy adjusts, and there may be no change in domestic interest rates or income in the long run as the system reaches a new equilibrium.

In a System of Freely Floating Exchange Rates and Perfect