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If we spend more on Imports and less on Domestic Goods, ceteris paribus, how will that...

If we spend more on Imports and less on Domestic Goods, ceteris paribus, how will that affect the Multiplier?

  1. Not enough info
  2. Decrease
  3. Increase
  4. No Change
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Answer #1

Decrease is the correct answer because

Factor affecting the size of the multiplier effect is the propensity to purchase imports. If, out of extra income, people spend their money on imports, this demand is not passed on in the form of fresh spending on domestically produced output. It leaks away from the circular flow of income and spending, reducing the size of the multiplier.

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