Scenario 10.2
A hypothetical open economy has a marginal propensity to import (MPI) equal to 0.2 and a marginal propensity to consume equal to 0.7. Assume that the economy is initially in equilibrium.
-Refer to Scenario 10.2. What is the spending multiplier of this economy?

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1 / (1 - MPC - MPI), where MPC is the marginal propensity to consume and MPI is the marginal propensity to import. In this case, MPC = 0.7 and MPI = 0.2, so the spending multiplier is 1 / (1 - 0.7 - 0.2) = 2.

Scenario 10.2 A Hypothetical Open Economy Has a Marginal Propensity to Import