Question 1
a) Discuss the advantages and disadvantages of free international trade.
b) Assume that two countries are competitors in the international trade markets. The two governments are thinking about whether it is profitable to adopt a free trade policy or not. The entries in the table below show (in millions of pounds) the gains of each policy. Find the Nash equilibrium. Explain how you reach your conclusion.
|
|
Country A
|
|
Free Trade Policy
|
Impose Restrictions
|
|
Country B
|
Free Trade Policy
|
60,60
|
20,70
|
|
Impose Restrictions
|
70,20
|
30,30
|
(c) Modify your answer when the table of gains are changed as:
|
|
Country A
|
|
Free Trade Policy
|
Imposing Restrictions
|
|
Country B
|
Free Trade Policy
|
60,60
|
70,80
|
|
Imposing Restrictions
|
70,70
|
80,60
|
Question 2
a) Imagine that you are Minister of Finance in a country which is in the middle of a recession. Discuss the economic policies that you can implement to improve the economy and the consequences of such policies if you identify yourself as:
(i) Keynesian, giving emphasis in the demand-side of the economy.
(ii) Monetarist.
(iii) (An economist giving emphasis only to the supply side of the economy.
b) Explain why, under fixed exchange rates, monetary policy is not effective.