PRC-3 · Chapter 15 · Question 27 of 44
If a country has a very high 'Marginal Propensity to Import', meaning citizens spend most of their new income on foreign goods, how does this affect the domestic multiplier?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It significantly reduces the size of the domestic multiplier
Explanation
Imports are a leakage. When new income is spent on imports, it immediately leaves the domestic circular flow, severely weakening the multiplier effect.
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