QUESTION 3

a) Evaluate the effectiveness of artificial trade barriers, such as tariffs and import quotas, as a way to achieve and maintain full employment throughout the New Zealand economy. How might such policies reduce unemployment in one New Zealand industry but increase it in another New Zealandindustry?

(10 marks)

b) Diagram a market in which the equilibrium dollar price of 1 unit of fictitious currency zee (Z) is $5 (the exchange rate is $5 =Z1). Then show on your diagram a decline in the demand for zee.

1. Referring to your diagram, discuss the adjustment options the United States would have in maintaining the exchange rate at $5 = Z1 under a fixed-exchange-ratesystem.

2. HowwouldtheU.S.balance-of-paymentssurplusthatiscausedbythedeclineindemand be resolved under a system of flexible exchangerates?

(15marks)

[Total: 25marks]