Aim for FiveMacroeconomics

Short free-response question

A tariff and the exchange rate

  • Unit 6
  • 5 points
  • About 12 minutes

You can use a calculator on this question, just like on exam day.

A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.

The question

Zelland and Raskia are trading partners with a flexible exchange rate. Zelland's currency is the zel, and Raskia's currency is the ras. The exchange rate is initially 4 ras per zel.

Suggested time: 12 minutes

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Part (a)

1 point

A bicycle made in Raskia sells for 600 ras. Calculate the price of the bicycle in zels at the initial exchange rate. Show your work.

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Part (b)

2 points

Zelland imposes a tariff on goods imported from Raskia. Describe a correctly labeled graph of the foreign exchange market for the zel, and show the effect of the tariff on the international value of the zel.

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Part (c)

1 point

Based on your answer to part (b), will the ras appreciate, depreciate, or remain the same relative to the zel?

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Part (d)

1 point

Suppose the exchange rate changes to 5 ras per zel. Identify whether the zel has appreciated or depreciated, and calculate the new price of the 600-ras bicycle in zels.

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