In a simple economy in which prices are constant and with no income taxes or imports, the marginal propensity to save is 0.2. If exports increase $50, what impact will that have on aggregate expenditure?
A) increase by $250
B) decrease by $250
C) decrease by $100
D) increase by $100

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.8 (since MPS is 0.2). The multiplier is 1/(1-MPC) = 1/0.2 = 5. Therefore, an increase in exports by $50 will increase aggregate expenditure by 5 * $50 = $250.

In a Simple Economy in Which Prices Are Constant and with No