Answer to Question #134978 in Macroeconomics for David Ngobeni

Question

A decrease in the marginal propensity to imports results in?

1. A decrease in the multiplier
2. Less domestic consumption
3. A decrease in aggregate spending
4. Less foreign exchange flowing out of the country

Answer 1

OPTION 4 IS CORRECT

Reason As Below:

1.where MPS= marginal propensity to save and MPM= marginal propensity to import

Now if MPM decreases, keeping MPS constant, denominator would decrease and so multiplier would be greater.

2.domestic consumption depends solely on Income and the MPS and not on MPM . So Consumption will be unaffected.

3.So, aggregate spending is affected by the above variables given in the equation. If Imports decrease then (X-M) would rise and so aggregate spending will rise. Also because it makes the multiplier larger so Aggregate spending would rise.

4.Foreign Imports are paid for by foreign currency. and so higher the imports higher will be outflow of foreign exchange, but if imports are lower then, outflow of foreign exchange will be lower.