Exchange Rate and Open Economy: Keynesian DD-AA Model

1) Apply the DD-AA model to analyze the effect of 2018 U.S. trade war on U.S. economy. Consider

both a temporary and permanent import tariff, respectively.

2) During the passage of the U.S. fiscal stimulus bill of February 2009, many members of Congress

demanded "buy American" clauses, which would have prevented the government from spending

money on imported goods. According to DD-AA model, would U.S. government spending

constrained by "buy American" restrictions have had a bigger effect on U.S. output than

unconstrained U.S. government spending? Why or why not?

3) Suppose U.S. Congress passes a constitutional amendment requiring the government to maintain

a balanced budget at all times. Thus, if the government wishes to change government spending, it

must always change taxes by the same amount, that is, G = T. Does the constitutional

amendment imply that the government can no longer use fiscal policy to affect employment and

output? (Hint: Analyze a "balanced-budget" increase in government spending, one that is

accompanied by an equal tax hike.)