Suppose that Canada imposes restrictions on the importation of textiles into Canada. According to the open-economy macroeconomic model, what would be the most likely result?
A) This policy would lower the real exchange rate and increase net exports.
B) This policy would lower the real exchange rate and have no effect on net exports.
C) This policy would raise the real exchange rate and decrease net exports.
D) This policy would raise the real exchange rate and have no effect on net exports.

Question

Quizplus · Accepted Answer

Import restrictions would raise the real exchange rate by reducing the supply of Canadian dollars in the foreign exchange market, but net exports would remain unchanged as the decrease in imports is offset by a decrease in exports due to the higher exchange rate.

Suppose That Canada Imposes Restrictions on the Importation of Textiles