Over the past two years, the unemployment rate in Country X has gone up from 5% to 9%. As the Minister of Finance in Country X, you have received from your advisers two courses of action you might take to address this unemployment problem. These are:

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

Policy 2: to use fiscal and monetary policies to solve the unemployment problem without resorting to restrictive trade practices

a. Explain two disadvantages of choosing Policy 1.

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

(i) Aggregate demand

(ii) Real GDP (Output)

(iii) The price level