The foreign trade multiplier of nation 1 is largest:
A)when there are no foreign repercussions
B)with foreign repercussions for an autonomous increase in nation 1's X that replace domestic production in nation 2
C)with foreign repercussions for an autonomous increase in I in nation 1
D)with foreign repercussions for an autonomous increase in I in nation 2

Question

Quizplus · Accepted Answer

The foreign trade multiplier is largest with foreign repercussions for an autonomous increase in investment (I) in nation 1 because this leads to an increase in income and demand in nation 1, which then increases imports from nation 2, thereby increasing nation 2's income and demand, which further increases their imports from nation 1, and so on, amplifying the initial increase in investment through the multiplier effect across borders.

The Foreign Trade Multiplier of Nation 1 Is Largest