2 Trade policy under floating exchange rates Y =C(Y-T)+I(r*)+G+NX(e) M/P L(r*,Y) At any given value of e, M,* a tariff or quota reduces e imports,increases NX, and shifts IS*to the right. e Results: △e>0,△Y=0 Y CHAPTER 12 Aggregate Demand in the Open Economy slide 14slide 14 M P  L(r * ,Y ) Y  C (Y T )  I (r *)  G  NX (e) Y e e1 Y1 1 * LM 1 * IS 2 * IS e2 At any given value of e, a tariff or quota reduces imports, increases NX, and shifts IS* to the right. Results: e > 0, Y = 0 2