Question

3.14 As income rises following an increase in autonomous net exports, induced imports will _____.
[1] decrease
[2] remain unchanged
[3] increase
[4] increase by the same value as increase in income

Answer 1

Increase. Notably, initial effect of a unit rise in autonomous investment expenditure is to raise output and income by one unit. If the (MPC − MPM) is large, this rise in income causes a large rise in induced expenditure, and the multiplier is large.