Assume the domestic economy is an open economy. Which of the following will make the government spending multiplier smaller?

Question

Quizplus · Accepted Answer

An increase in the marginal propensity to import means that a greater proportion of each additional dollar of income is spent on imports rather than domestically produced goods and services. As a result, the government spending multiplier is smaller because the initial increase in government spending will lead to a smaller increase in total output due to the leakages from imports.

Assume the Domestic Economy Is an Open Economy