If the marginal propensity to import increases, the spending multiplier increases.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. The higher the MPC, the higher the spending multiplier because more money is spent and circulates throughout the economy. However, the marginal propensity to import is not directly related to the spending multiplier. In fact, an increase in the marginal propensity to import could lead to a decrease in the spending multiplier because more money is leaving the economy through imports, reducing the overall impact of the initial spending.

If the Marginal Propensity to Import Increases, the Spending Multiplier