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 in an open economy can be calculated using the formula 1/(1-MPC+MPI). In this scenario, the MPC is 0.7 and the MPI is 0.2. Plugging these values into the formula, we get 1/(1-0.7+0.2) = 1/0.5 = 2. Therefore, the spending multiplier for this economy is 2, which means that for every $1 increase in autonomous spending, total spending in the economy will increase by $2.