Free Response 2008 Form B

Scoring Guidelines 2008 Form B

Question 1 (d)

  • The higher interest rate reduces the outflow of funds to countries that now have a relatively lower interest rate.

Question 2 (a)

  • Reducing tariffs will cause the domestic price of automobile to fall in Mexico, lowering the production of cars in Mexico.

    8 Economic Effects of Tariffs thismatter.com Quantity Produced by Domestic Suppliers Domestic Price Without Trade Cons er Surpl Gain from World price + Tariff — Producer Surplus Quantity Demanded by Domestic Buyers Tax World price Gain from Tariff Revenue Imput Quantity Deadweight Losses Quantity

    FIGURE 4.5 Caterpillar, Inc. 112,500 110,000 MCI = ACI 105,000 MCO = AC 100,000 o 1 MA go 100 Demand = Price Quantity of Tractors A tariff placed on imported steel increases the costs of a steel-using manufacturer. This increase leads to a higher price charged by the manufacturer and a loss of international competitiveness. C 2011 Cengage Learning. All Rights May notbe copied, scanned, or duplicated, in whole or in part exceptfor use as permitted ina license distributed with a certain product or service or otherwise on a password-protected website for classroom use 56

Question 2 (b)

  • Current Account = Export - Import - Investment Income

  • The reduction in tariff increases imports relative to exports

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