In an open economy, the marginal propensity to consume is 0.8 and the marginal propensity to import is 0.3. In a year, exports rise by Rs 100 crore and autonomous imports rise by Rs 50 crore. Which of the following is correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Income rises by Rs 100 crore and total imports rise by Rs 80 crore.
Given:
c = 0.8
m = 0.3
Rise in exports, ΔX = Rs 100 crore
Rise in autonomous imports = Rs 50 crore
Exports raise demand for domestic goods. Autonomous imports lower it. The net change in autonomous demand works through the open economy multiplier.
\( \displaystyle \text{Multiplier} = \frac{1}{1 - c + m} = \frac{1}{1 - 0.8 + 0.3} = \frac{1}{0.5} = 2 \)
Change in autonomous demand = 100 − 50 = Rs 50 crore
\( \Delta Y = 2 \times 50 = \) Rs 100 crore
Total imports = autonomous imports + mY, so they rise by both parts.
\( \Delta M = 50 + 0.3 \times 100 = \) Rs 80 crore
Option (2) — Rs 250 crore uses the closed multiplier 1/(1 − c) = 5.
NCERT (2026-27):
“DETERMINATION OF EQUILIBRIUM INCOME IN OPEN ECONOMY … An increase in demand for our exports is an increase in aggregate demand for domestically produced output and will increase demand just as would an increase in government spending or an autonomous increase in investment. In contrast, an autonomous rise in import demand is seen to cause a fall in demand for domestic output and causes equilibrium income to decline.” |
