Question

What is the marginal propensity to import when M = 60 + 0.06Y? What is the relationship between the marginal propensity to import and the aggregate demand function?

Answer 1

Marginal propensity to import indicates the extent to which imports change when the income of an economy changes.

It is given as M = 60 + 0.06Y

M = M + mY

$\therefore$ Here (m) Marginal propensity to import = 0.06

The marginal propensity to import negatively affects the aggregate demand function.

When income increases, aggregate demand decreases. This is because the additional amount is spent on foreign goods and on domestic goods both.