1. Describe the mechanism that leads from a change in fiscal policy to changes in interest rates, the exchange rate, and the trade balance. Do the same for monetary policy.
2. Describe the mechanism that leads from a change in monetary policy to changes in interest rates, the exchange rate, and the trade balance.

3. Explain ‘Twin Deficits.’
4. A firm has $200 in sales in the home country and $400 in sales in the host country. It incurs $100 in production costs in each country. In addition, it incurs $100 in research costs. All research is done in the host country. The home country’s tax on domestically earned profits is 30%. Calculate the firm’s after tax profits without transfer pricing (i.e. no payments are made between the parent and the subsidiary for research expenses) when:

A) the host tax is 40% and exemptions are used.

B) the host tax is 40%, the home tax on foreign earned profits is 30%, and credits are used.

C) the host tax is 40%, home taxes are uniform, and credits are used.

D) the host tax is 20%, the tax on foreign earned profits is 20%, and credits are used.

E) the host tax is 20%, home taxes are uniform, and credits are used.

F) the host tax is 40%, the tax on foreign earned profits is 30%, and deductions are used.
5. Repeat question #3, but now allow for transfer pricing.
*Source: the text book used for this course is the Introduction to International Economics 3rd Edition. Dominick Salvatore. Published by John Wiley & Sons, Inc.