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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