EC 340

Problem Set #9 - Trade and National Income

Due by the end of class on April 20, 1998.

1. Consider a small open economy in which the marginal propensity to consume is 0.75 and the marginal propensity to import foreign goods is 0.15. How much will national income rise in response to a $100 million increase in investment spending?

2. Suppose that our marginal propensity to save is 0.3, our marginal propensity to import foreign goods is 0.15, the foreign marginal propensity to save is 0.25, and the foreign marginal propensity to import our good is 0.2. What is the value of the spending multiplier?

3. "A country with a balance of payments deficit runs the risk of increasing inflation if it defends its fixed exchange rate by (unsterilized) official intervention in the foreign exchange market." Do you agree or disagree? Why?

4. 10 years ago, the United States enjoyed a small trade surplus with China. Now, we have an enormous trade deficit with China. What happened?



David A. Latzko
318 COB
Department of Business and Economics
Wilkes University
Wilkes-Barre, PA 18766
phone: (717) 408-4718
fax: (717) 408-4917
dlatzko@wilkes.edu
wilkes1.wilkes.edu/~dlatzko