When the marginal propensity to consume foreign imports (MPC_F) rises, ceteris paribus, what happens to the trade balance? A) It increases. B) It decreases. C) It depends on what happens to the MPC of domestic goods. D) It will not change.

Question

Quizplus · Accepted Answer

When the marginal propensity to consume foreign imports (MPC_F) rises, it means that consumers are more likely to spend a higher proportion of their income on foreign goods rather than domestic goods. This implies an increase in imports and, holding all else constant, will result in a decrease in the trade balance. Therefore, the correct answer is B - it decreases.

When the Marginal Propensity to Consume Foreign Imports (MPCF) Rises

When the Marginal Propensity to Consume Foreign Imports (MPC_F) Rises