Consider an open economy. Assume that all prices are flexible and there is complete information. Assume that aggregate consumption depends on current and expected future disposable income as well as on the real interest rate. Speculate on what would happen to the real exchange rate, the nominal exchange rate, net exports, the domestic real interest rate, domestic output, domestic investment, domestic nominal and real wages, and employment if:
A. Tariffs on imported goods rise. Assume other taxes fall so that total tax revenue is unchanged.
B. A temporary increase in productivity that results in a substantial increase in output but does not change the marginal products of labor or capital.