If the MPS is one-third, a $100 increase in net exports will
A)reduce real Gross Domestic Product (GDP)by $100.
B)reduce real Gross Domestic Product (GDP)by $300.
C)increase real Gross Domestic Product (GDP)by $33.
D)increase real Gross Domestic Product (GDP)by $300.

Question

Quizplus · Accepted Answer

The Marginal Propensity to Save (MPS) is one-third, meaning the Marginal Propensity to Consume (MPC) is two-thirds. The spending multiplier is 1/(1-MPC) = 1/(1-2/3) = 3. Therefore, a $100 increase in net exports will increase real GDP by $100 * 3 = $300.

If the MPS Is One-Third, a $100 Increase in Net