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Read the following passage and answer the question that follows:

What have been the effects of the already imposed new trade barriers and what would be the impact of an accelerated trade war on labour markets? The first escalation into a trade war would be a continued spiral of retaliatory measures imposed on trading partners with the purpose of harming the trading partners’ possibilities to export into the home market. The most important channel of protectionist trade measures would run through price effects, impacting households through the real wage channel. Indeed, focussing on the recent increases in tariffs, Amiti et al. find that the full incidence for the US economy falls on consumers and leads to a reduction of real income in the amount of USD 1.4 billion per month (efficiency loss) plus USD 3 billion per month in added tax costs that become revenue for the government.

Q. With reference to the above passage, which of the following statement(s) is/are correct? Select the correct answer using the codes given below:


A

1 only
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B

2 only
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C

Both 1 and 2
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D

Neither 1 nor 2
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Solution

The correct option is B
2 only
Explanation:

Statement 1 is incorrect:
Refer the following lines, “The first escalation into a trade war would be a continued spiral of retaliatory measures imposed on trading partners with the purpose of harming the trading partners’ possibilities to export into the home market. The most important channel of protectionist trade measures would run through price effects, impacting households through the real wage channel.”
The statement is contradicting the claim made by the passage that the households will be affected by such a trade war. Hence it is incorrect.

Statement 2 is correct: Refer the following line, “Indeed, focussing on the recent increases in tariffs, Amiti et al. find that the full incidence for the US economy falls on consumers and leads to a reduction of real income in the amount of USD 1.4 billion per month (efficiency loss) plus USD 3 billion per month in added tax costs that become revenue for the government.”

The study by Amiti et al. shows that while the consumers will suffer a loss from the increased tariffs, the government will benefit from it due to increase in tax revenue.  This is explained in the statement and it is correct.
 

CSAT

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