A country has a marginal propensity to save of 0.15 and a marginal propensity to import of 0.4. Real domestic spending now decreases by $2 billion.
a. According to the spending multiplier (for a small open economy), by how much will domestic product and income change?
b. What is the change in the country’s imports?
c. If this country is large, what effect will this have on foreign product and income? Explain.
d. Will the change in foreign product and income tend to counteract or reinforce the change in the first country’s domestic product and income? Explain.