Practice question · Multiple choice
The spending multiplier is larger when the marginal propensity to consume is higher. Why does that make the multiplier weaker in an open economy?
Hints
- Trace one euro of stimulus through two or three rounds of spending.
- Ask which parts of each round do NOT become domestic income.
Show the answer
D. Because income spent on imports leaves the domestic circuit
Why
Every leak shrinks the geometric series. Saving, tax and imports all divert income from the next round, which is why small open economies get less domestic traction from the same package.
Practise Fiscal Policy
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More questions on Fiscal Policy
- Why might a large debt-financed stimulus partially _undermine itself_?
- The same stimulus produces a much larger effect in a deep recession than in a boom. What accounts for the…
- Which are genuine limitations of discretionary fiscal policy?
- A country running a budget deficit must see its public debt rise as a share of GDP.
- Sort each stabilizing force: automatic stabilizer or discretionary measure?
- Match each fiscal concept to its definition.