In an open economy,if government expenditures,tax receipts,and exports are the same at all levels of GDP,the multiplier effect of a $1 increase in intended spending on net exports raises the equilibrium GDP by ________,where MPI = marginal propensity to import.
A) 1/MPI
B) 1/(MPS + MPI )
C) 1/(MPS - MPI )
D) 1/(1 - MPI )
E) 1/(MPC + MPI )

Question

Quizplus · Accepted Answer

In an open economy, the multiplier is affected by both the marginal propensity to save (MPS) and the marginal propensity to import (MPI). The correct formula for the multiplier in this context is 1/(MPS + MPI).

In an Open Economy,if Government Expenditures,tax Receipts,and Exports Are the Same