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      Question

      A "Transfer Problem" arises when a country makes a

      unilateral payment to another country. According to the Ohlin-Samuelson view, the paying country's terms of trade will necessarily worsen only if:
      A The payer has a higher marginal propensity to consume its own export goods than the receiver. Correct Answer Incorrect Answer
      B The sum of the marginal propensities to consume the traded goods is greater than one. Correct Answer Incorrect Answer
      C The paying country has a fixed exchange rate. Correct Answer Incorrect Answer
      D The receiving country has a lower marginal propensity to consume the payer's export goods. Correct Answer Incorrect Answer

      Solution

      If the paying country (transferor) reduces its spending on its own exportable goods by more than the receiving country (transferee) increases its spending on those same goods, a world excess supply of the transferor's exports is created, forcing their price down and worsening the transferor's terms of trade.

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