1. An increase in the marginal propensity to import will _____ the multiplier for investment spending.

2. An increase in exports will lead to a(n) _____ in GDP.

3. Use the income-expenditure graph to illustrate how an increase in exports will affect GDP.

4 As a country s income increases imports will also increase. _____ (True/False)

5. Trade Wars. During the 1930s, many countries in the world including the United States tried to help their own economies by restricting imported goods. But because one country s imports are another country s exports, such actions cause international repercussions. Let s look at the worldwide consequences of such policies using the income-expenditure model.

a. Suppose the United States adopted policies to reduce imports from Europe. This means European exports to the United States would be reduced. What would happen to European equilibrium income?

b. Suppose, in response to U.S. policies, Europe decides to restrict imports from the United States. What then happens to U.S equilibrium income?

c. What do you think happened to the volume of world trade during the 1930s?

6. Using Open-Economy Multipliers. In an open economy, the marginal propensity to consume is 0.9, and the marginal propensity to import is 0.3. How much of an increase in investment would be necessary to raise GDP by 200? What would be your answer if this was a closed economy?

7. U.S. Export Growth. In 2007, several components of GDP grew much more slowly than in prior years but exports increased sharply. The rest of the world was growing rapidly during this period. Based on this information, what is the most natural explanation for the growth in U.S. exports?