Suppose that Canada imposes restrictions on the importation of steel into the Canada. According to the open-economy macroeconomic model, which of the following would be the most likely result?
A)This policy would lower the real exchange rate and increase net exports.
B)This policy would lower the real exchange rate and have no effect on net exports.
C)This policy would raise the real exchange rate and decrease net exports.
D)This policy would raise the real exchange rate and have no effect on net exports.

Question

Quizplus · Accepted Answer

Import restrictions typically lead to an appreciation of the real exchange rate because they reduce the supply of domestic currency in the foreign exchange market. However, net exports remain unchanged because the decrease in imports is offset by the appreciation of the currency, which makes exports more expensive and imports cheaper.

Suppose That Canada Imposes Restrictions on the Importation of Steel