Which of the following will occur in a small country with a high marginal propensity to import?

Question

Quizplus · Accepted Answer

A high marginal propensity to import means that a large portion of any increase in income will be spent on imported goods, leading to a larger trade deficit. Therefore, changes in government spending (e.g. stimulus packages) are likely to have a larger impact on the trade balance than on output. Option A is incorrect because the trade balance is affected more than output. Option C is incorrect because a depreciation of the country's currency would make imports more expensive and could potentially reduce imports, leading to a smaller trade deficit. Option D is incorrect because it is possible for a combination of policies (such as fiscal and monetary policies) to reduce the trade deficit, albeit not necessarily completely eliminate it. Therefore, only Option B is the most accurate statement.

Which of the Following Will Occur in a Small Country