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For Small Open Economy, Assume That the Marginal Propensity to Import

Question 2

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For small open economy, assume that the marginal propensity to import is 0.3, and that interest rates, exchange rates, and the price level are all constant. If an increase of $10 billion in government spending results in an increase of $6 billion in imports, then:


A) real GDP increases by $4 billion.
B) the spending multiplier is 2.
C) taxes increase by $10 billion.
D) real domestic investment decreases by $4 billion.

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