Question

In an open market economy, how does an increase in marginal propensity to consume affect consumption, net exports, investments, nominal exchange rate, and price level in long run and very-long run?

Answer 1

--> An open economy is a type of economy that trades with the other countries. For suppose if there are no rules and restrictions on trade, then the members of an open economy can buy and sell the goods and also dervices at the price prevailing in the world market, the world price.

--> Also an open economy can provide the domestic households with a wide variety of goods and services, gives domestic companies permission to the global markets and customers and also offer goods and services which are more compettively priced.

--> In addition to that, it also can offer the domestic investors access to the foreign capital markets, foreign assets and also greater investment oppurtunities.

--> Also the marginal propensity to consume (MPC) indiactes the proportion of an additional unit of disposable income that is consumed.

--> Generally in this sort of open economy, in case if the marginal propensity to intake is increased, then it will increase the consumption, exports also may reduce because the demand for the goods may be higher in the domestic economy, investments also will increase,nominal exchange rate will also be appreciable and the price level in the long run may increase but n very long run the prices may get stabilized.

--> When the MPC gets increases, the companies makes more investments decisions in a way to expand their stock of physical capital such as the building new factories or adding of the new eqipment to the existing faclities to meet the increased demand.