The government of Exampleland is considering the introduction of a new trade policy that would consist of rescinding existing free-trade agreements and imposing tariffs on imports.

a) What would be the likely impact of such a policy on the economy's natural unemployment rate ( sub )? Explain.

b) On a graph with the unemployment rate () on the horizontal axis and the inflation rate () on the vertical axis, would this policy tend to shift the Phillips Curve down or up?

This economy currently has an unemployment rate of 10% and its real GDP is growing at a 2.6% annual rate. A high-ranking official in the treasury department is quoted in the newspaper as saying that next year's forecast real GDP growth rate of 4.1% is expected to bring down the unemployment rate to 7% within a year. The same report also quotes an economist saying that the government's predictions are "highly unlikely" because they "fly in the face of decades of macroeconomic research."

c) Who do you believe, and why? Use the appropriate models and concepts in this course to back up your answer.