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Unformatted text preview: and construction equipment be purchased from France rather than from Japan. How does such tying of aid affect the transfer problem analysis? Does tying of aid make sense from the donors point of view?  4. Home is an exporter of cloth and an importer of food. The marginal propensities to spend (MPS) on cloth and food at Home are 0.3 and 0.7 respectively. Foreign, which is Homes trading partner, has a MPS of 0.5 on each good. Now suppose that Home makes an untied aid transfer to Foreign. (i) Calculate the effect of this transfer on the national division of world spending on food and cloth. What happens to the world relative demand for cloth? (ii) Using an appropriate graph, depict the effect of the transfer on Homes terms of trade. Is Home better-off or worse-off after the transfer? (iii) Relate your answer to part (ii) to the Transfer Problem debate between Keynes and Ohlin. [2x3=6]...
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- Spring '11