The greater the marginal propensity to import:
A)the smaller the spending multiplier.
B)the greater the level of investment.
C)the greater is the net export.
D)the smaller is the level of consumption.

Question

Quizplus · Accepted Answer

The marginal propensity to import (MPI) is the fraction of each additional unit of income that is spent on imports. If MPI is high, then when there is an increase in income, a larger portion of that increase will be spent on imports rather than domestically produced goods and services. This means that the spending multiplier (the amount by which total spending increases in response to an initial increase in income) will be smaller because the increase in spending will leak out of the economy through imports. Therefore, choice A is the correct answer.

The Greater the Marginal Propensity to Import