Small open economies are subject to the whims of foreign legislators when they choose to use protectionist measures to protect employment in their countries. The pur¬pose of this question is to evaluate the economic effects of legislation passed by foreign legislators. Assume that legislators in Country B pass legislation designed to restrict the size of imports from Country A.
a. Assuming flexible exchange rates, and assuming a fixed price level, what are the effects of the import restrictions on output, the real exchange rate, exports, imports, and net exports in Country A?
b. How is your answer to part (a) affected by allowing the domestic price level to adjust?
c. Assuming fixed exchange rates now, and assuming a fixed price level, what are the effects of the import restrictions on output, the real exchange rate, exports, imports, and net exports in Country A?
d. How is your answer to part (c) affected by allowing the domestic price level to adjust?