Higher is the marginal propensity to import, lower is the net spending on domestic goods, lower is the slope of the AE curve and lower is the multiplier.

Question

Quizplus · Accepted Answer

A higher marginal propensity to import implies that a larger portion of any increase in income is spent on imports rather than domestic goods. This reduces the net spending on domestic goods, flattens the aggregate expenditure (AE) curve due to a smaller change in total spending for a given change in income, and thus lowers the multiplier effect since each dollar of initial spending leads to a smaller increase in total income.

Higher Is the Marginal Propensity to Import, Lower Is the Net