In an open economy,which of the following will cause a reduction in the size of the multiplier?

Question

Quizplus · Accepted Answer

An increase in the marginal propensity to import means that for every additional unit of income, a larger proportion is spent on imports, which reduces the amount of spending on domestic goods and services. This reduces the multiplier effect as a smaller proportion of the increased spending goes towards domestic production. An increase in foreign output (B) would not directly affect the size of the multiplier as it does not change the domestic economy's ability to spend and produce. A reduction in the marginal propensity to save (C) would actually increase the size of the multiplier as it means more of the income is spent rather than saved, leading to more rounds of spending and income generation. Therefore, the correct answer is A, an increase in the marginal propensity to import.

In an Open Economy,which of the Following Will Cause a Reduction