For Small Open Economy, Assume That the Marginal Propensity to Import

Multiple Choice

For small open economy, assume that the marginal propensity to import is 0.3, and that interest rates, exchange rates, and the price level are all constant. If an increase of $10 billion in government spending results in an increase of $6 billion in imports, then:

A) real GDP increases by $4 billion.
B) the spending multiplier is 2.
C) taxes increase by $10 billion.
D) real domestic investment decreases by $4 billion.