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

Question

Quizplus · Accepted Answer

In a small country with a high marginal propensity to import, changes in government spending will cause large changes in the trade balance because a higher income from government spending will lead to higher imports, and thus a larger trade deficit. A depreciation may also cause some changes in the trade balance, but the effect will likely be smaller compared to changes in government spending. Changes in output may not necessarily have a direct impact on the trade balance. And while there may not be a single policy that can completely eliminate the trade deficit, implementing a combination of policies such as increasing exports and reducing imports can help lower the deficit.

Which of the Following Will Occur in a Small Country