Imagine a two good H-O economy which imports automobiles and exports wheat. Suppose the production of these two goods use only capital and labor. If the government raises a tariff on the import of automobiles it will raise the domestic price of autos. Suppose the price of wheat remains constant.

A. Apply the magnification effect on prices to explain who in the economy will gain and who will lose because of the tariff? Be sure to state any additional assumptions needed to answer the question.

B. Are the effects described in part A short-run effects or long-run effects? Briefly explain why.

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