If the MPS = 0.25 and the MPM = 0.25, the spending multiplier with net exports equals
A)5
B)4
C)3
D)2
E)1

Question

Quizplus · Accepted Answer

The spending multiplier equals 1/(1-MPC), where MPC (marginal propensity to consume) equals 1-MPS (marginal propensity to save). From the given information, we can derive MPC as follows: MPC = 1 - MPS = 1 - 0.25 = 0.75. The marginal propensity to import (MPM) is not relevant to calculating the spending multiplier with net exports. Thus, the spending multiplier with net exports equals 1/(1-0.75) = 4.