Question

Fiscal stimulus is not an effective policy when the marginal propensity to import is large. Explain

Answer 1

Marginal propensity to import is an increase or decrease in the amount of imports for an increase or decrease in disposable income.

Fiscal stimulus is the fiscal policy adopted by the government in order to stimulate a floundering economy. Here the government reduces taxes or increase spending so that the economy boosts up to produce more.

Now when the marginal propensity to import is large, the stimulus package adopted to increase economic growth would be ineffective as people tend to use more of import than produce.