In an open economy, if only the demand for consumption and imports are dependent

Question

In an open economy, if only the demand for consumption and imports are dependent on income and the marginal propensity to consume is the same as the marginal propensity to import, the multiplier will be:

(a) Equal to 1 if there is lump-sum tax and less than 1 if the tax is proportional;

(b) Equal to 1 if there is a proportional tax and greater than 1 if there is a lump-sum tax;

(c) Equal to 1 if there is a lump-sum tax and greater than 1 if the tax is proportional;

(d) Equal to 1 if there is a proportional tax and less than 1 if there is a lump-sum tax.

Explanation / Answer

The marginal propensity to consume is the same as the marginal propensity to import, the multiplier will be:

(a) Equal to 1 if there is lump-sum tax and less than 1 if the tax is proportional;

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