Suppose that, at the equilibrium level of income in a country, the country has a current Account (X-- M) deficit of 60. The country's marginal propensity to consume = 0.7, and the country's marginal propensity to import = 0.2. If contraction in imports by means Of reducing national income is the method to be used to eliminate the current account Deficit, by how much must national income be reduced?

Question

Quizplus · Accepted Answer

To eliminate the current account deficit of 60, we need to understand how changes in national income affect imports. The marginal propensity to import (MPI) is 0.2, meaning for every unit increase in national income, imports increase by 0.2 units. To reduce imports (and thus the current account deficit) by 60, we divide the deficit by the MPI: 60 / 0.2 = 300. Therefore, national income must be reduced by 300 to eliminate the current account deficit.

Suppose That, at the Equilibrium Level of Income in a Country