If a country imposes a tariff on some good,then which of the following curves shifts right?
A)both the demand for loanable funds and demand in the market for foreign-currency exchange.
B)the demand for loanable funds and demand in the market for foreign-currency exchange.
C)demand in the market for foreign-currency exchange but not the demand for loanable funds.
D)neither the demand for loanable funds nor demand in the market for foreign-currency exchange.

Question

Quizplus · Accepted Answer

When a country imposes a tariff on some good, it makes the imported good more expensive relative to domestic goods. As a result, people will demand fewer foreign goods and instead demand more domestic goods. This increased demand for domestic goods relative to foreign goods increases the demand for domestic currency (since people need domestic currency to buy domestic goods) and decreases the demand for foreign currency (since people need less foreign currency to buy fewer foreign goods). Hence, the demand in the market for foreign-currency exchange shifts to the left, and the demand for domestic currency (and thus the supply of foreign currency) shifts to the right. This increase in the demand for domestic currency could potentially increase the demand for loanable funds, but this effect is ambiguous and depends on various factors such as the size and duration of the tariff, the elasticity of demand for the domestic currency, and the interest rate effects of the tariff. Therefore, choice C is the only correct answer.

If a Country Imposes a Tariff on Some Good,then Which