When taking into account foreign-income repercussions, the spending multiplier is:
A)smaller because an increase in domestic imports causes current account deficit.
B)larger because an increase in domestic imports causes foreign income to rise and thus boosts domestic exports.
C)smaller because an increase in domestic imports lowers the growth in the domestic exports.
D)larger because an increase in domestic imports causes a surplus in the official settlements balance.

Question

Quizplus · Accepted Answer

The spending multiplier is larger when foreign-income repercussions are considered because increased domestic imports can lead to higher foreign income, which in turn can boost domestic exports, amplifying the overall effect of the initial spending change.

When Taking into Account Foreign-Income Repercussions, the Spending Multiplier Is