Table 13.1.Canada's Saving,Investment,Import,and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates
Export Function X = 3000
Investment Function I = 1000
Saving Function S = -1000 + 0.2Y
Import Function M = 500 + 0.25Y
-Referring to Table 13.1,Canada's foreign trade multiplier equals:
A) 1.75
B) 2.05
C) 2.22
D) 2.64

Question

Quizplus · Accepted Answer

The foreign trade multiplier is calculated as 1/(MPS + MPM), where MPS is the marginal propensity to save and MPM is the marginal propensity to import. Here, MPS = 0.2 and MPM = 0.25, so the multiplier is 1/(0.2 + 0.25) = 2.22.

Table 131Canada's Saving,Investment,Import,and Export Functions (In Billions of Dollars) Under a a System