PRC-3 · Chapter 15 · Question 34 of 44
If a country has a very high Marginal Propensity to Import (citizens spend most new money on foreign goods), how will this specific leakage affect the domestic Investment Multiplier?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It severely reduces the size and power of the domestic multiplier
Explanation
Imports represent money leaving the domestic economy. If new income immediately leaks abroad, it cannot circulate domestically, severely weakening the multiplier effect.
More Multiplier and Accelerator MCQs
- Q36The topmost point of a business cycle, characterized by factories operating at maximum capacity, practically zero unemployment, and severe…
- Q37When an economy suffers from at least two consecutive quarters of falling real GDP, rising bankruptcies, and increasing unemployment, it…
- Q38An unusually deep and prolonged trough in the business cycle, where economic activity remains severely paralyzed with massive unemployment…
- Q39If the government decides to suddenly raise income taxes, leaving households with much less disposable income, what will happen to the…
- Q40In a closed economy with no government, actual output is Rs. 20 million while full-employment potential is Rs. 25 million. If the Marginal…