Exercise 4 A country imposes an import tariff, represented by , with A(0.1). Suppose that the currency

Exercise 4 A country imposes an import tariff, represented by τ, with τA(0.1). Suppose that the currency in this country is the peso and that the international currency accepted for transactions is the pataca.

a. How does the imposition of this tariff affect the real exchange rate between the peso and the pataca in the short term, that is, with fixed prices? What is the long-term effect of this measure after eventual price adjustments?

b. How will the imposition of the tariff affect the nominal exchange rate in the short term?

What is the long-term effect?