Over the past two years, the unemployment rate in Country X has risen from 5 percent to 9 percent. As the leader of Country X, you have been presented with two policy options, to address the unemployment problem.

Policy 1: Use tariffs and quotas to restrict imports and thus protect jobs in Country X.

Policy 2: Use monetary and fiscal policies to solve the unemployment problem without resorting to trade restrictions.

(a) Explain two disadvantages of selecting Policy 1.

(b) Describe in detail one specific monetary policy action and one specific policy action you would take to reduce unemployment. Explain how each of these actions would affect each of the following in the short run.

(i) Aggregate Demand

(ii) Output and the price level

(iii) Real interest rates

(c) If the interest rate effects you identified in Part (b) continue in the long run, explain the impact of these effects on economic growth.