SOALAN/QUESTION 1 (30 MARKAH/MARKS)

Read and understand carefully the following article:

"Trade war between US and China helping India boost its exports"

ByGayatri Nayak

Mumbai: The US-China trade war is indirectly helping India boost its exports, but that may begin to hurt smaller economies and others if China's growth slows down due to the conflict, Beth Ann Bovino, US chief economist for rating company Standard & Poor's said.

But the Indian rupee may weaken further if the US government goes ahead with more fiscal cuts to boosts its economy.It would force more funds to chase growth there, she said.The Chinese are seen substituting their cotton imports from US to India and other Asian economies.

"A good example is cotton,'' Ann told ET in an interview. "China's spending on cotton is large. It was first going to the US. It has now shifted to India." India's trade deficit with China has shrunk over the last two months.The trade war between China and the US has led to tariffs on both goods treaded between the countries. That has led to China reducing imports from the US and shifting to countries such as India.

India along with some other Asian economies are to benefit from the higher import tariffs that China has imposed on the US in retaliation to US imposing tariffs on steel and aluminum imports through import substitution.

But the smaller economies may get hurt due to this tit-for-tat between the two biggest economies."The small open economies may get the biggest brunt. India is very large. So, the impact may be smaller," she said.

Assume that output began at its natural level. By using AD-AS (upward sloping) and Phillips curves and based on the above report, analyze the short and long run effects of the trade war between US and China on the price level, output and employment of India.