Read the following statements:
Statement I: The increase in imports per unit of income is an additional injection into the circular flow at each round of the multiplier process.
Statement II: An autonomous rise in import demand raises equilibrium income in an open economy.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both Statement I and Statement II are false.
Statement I: The increase in imports per unit of income is an additional injection into the circular flow at each round of the multiplier process. — False. Imports take spending away from domestic goods. They are an additional leakage, which makes the open economy multiplier smaller.
Statement II: An autonomous rise in import demand raises equilibrium income in an open economy. — False. It lowers demand for domestic output, so equilibrium income falls.
NCERT (2026-27): “DETERMINATION OF EQUILIBRIUM INCOME IN OPEN ECONOMY … The increase in imports per unit of income constitutes an additional leakage from the circular flow of domestic income at each round of the multiplier process and reduces the value of the autonomous expenditure multiplier.” “DETERMINATION OF EQUILIBRIUM INCOME IN OPEN ECONOMY … 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.” |