Question

If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____ (assuming no retaliation by other governments).

1) decrease
2) increase
3) remain unaffected
4) decrease AND remain unaffected is possible

Answer 1

Reducing a tariff on imported flat screen televisions will cause the equilibrium price to decrease due to lower costs for importers and an increase in the equilibrium quantity due to higher demand as the TVs become more affordable.

Step-by-step explanation:

When a country's government imposes a tariff on imported goods, it affects the cost of those goods within the domestic market. If we specifically consider a situation where the government reduces a tariff on imported flat screen televisions, we can analyze the effects using a four-step analysis:

1. The cost for importers will decrease, as they have to pay less in taxes to bring the products into the country.
2. As importers' costs decrease, they will lower the prices at which they sell these televisions to retailers or consumers.
3. Lower prices for consumers will lead to an increase in demand for flat screen TVs because they are more affordable than before.
4. Equilibrium quantity of imported TVs will rise due to the increased demand, and the equilibrium price within the domestic market will decrease as a result of the tariff reduction.

This change in the tariff will likely lead to an increase in the country's current account deficit, because cheaper imported goods may replace domestic production, leading to higher import volumes.