PRC-3 · Chapter 15 · Question 19 of 44
If an economy is heavily dependent on imports, meaning a massive portion of any new consumer income is immediately spent on foreign goods (high marginal propensity to import). How does this specifically 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. If new income is heavily spent on imports, that money leaves the domestic circular flow immediately, significantly dampening and reducing the domestic multiplier effect.
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