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

Question

Accepted Answer

> [!TLDR]
> The marginal propensity to import (MPM) is the slope of the import function with respect to income — here, **0.06**. It directly reduces the slope of the aggregate demand function, making it flatter than the consumption function alone.

The marginal propensity to import (MPM) tells us how much additional spending on imports is induced when national income rises by one unit. In the given import function

$$
M = 60 + 0.06\,Y,
$$

the constant term 60 represents **autonomous imports** — imports that occur even when income is zero (e.g., essential raw materials or contracted purchases). The coefficient of $Y$, which is **0.06**, is the marginal propensity to import. It means that for every ₹1 increase in national income, imports rise by ₹0.06.

> [!FORMULA]
> $$ 	ext{MPM} = \frac{\Delta M}{\Delta Y} = 0.06 $$

Now, why does this matter for the aggregate demand function? In a simple Keynesian model with imports, aggregate demand (AD) is:

$$
AD = C + I + G + (X - M).
$$

If we write the consumption function as $C = \bar{C} + cY$ (where $c$ is the marginal propensity to consume), and the import function as $M = \bar{M} + mY$ (where $m$ is the MPM), then AD becomes:

$$
AD = \bar{C} + cY + I + G + X - \bar{M} - mY.
$$

Group the autonomous terms together: $A = \bar{C} + I + G + X - \bar{M}$. Then

$$
AD = A + (c - m)Y.
$$

> [!WARNING]
> A common mistake is to think the slope of AD is just $c$. It is actually $c - m$, because imports leak out of the circular flow — they represent spending that does not return to domestic producers. …

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

Concept understanding — Marginal Propensity to Consume

Marginal Propensity to Consume (MPC)

Start with everyday intuition

The precise meaning

Why MPC matters

A word on the diagram …

Step 1 — Keynes's psychological law of consumption

Step 2 — Express with MPC

Step 1 — Split additional income

Step 2 — Divide through by $\Delta Y$

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

🎓Unlock everything free for 14 days

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

Unlock everything free for 14 days