Trade and Labor Shocks (30 Points): Consider a closed Neoclassical Economy representing the country of Farlandia, initially in equilibrium. The government is considering opening the economy to trade with foreign countries. The president of Farlandia is coming to you, asking for advice. (a) Should the economy open to trade? Compare the effects on output, consumption, investment, interest rates, exchange rates, and the labor market in the following scenarios before and after trade liberalization in Farlandia: • Domestic Workers Strike (Increase in 0:) • Decrease in shipping availability (negative trade shock Q:) • Decrease in future productivity • Decrease in the real foreign exchange rate. (b) Should Farlandia’s economy open to trade? Make an economic argument drawing on the con- clusions you came to above.

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