If the MPS is 1/3, a $200 increase in net exports will
A) reduce real Gross Domestic Product (GDP) by $600.
B) reduce real Gross Domestic Product (GDP) by $300.
C) increase real Gross Domestic Product (GDP) by $300.
D) increase real Gross Domestic Product (GDP) by $600.

Question

Quizplus · Accepted Answer

The Marginal Propensity to Save (MPS) is 1/3, which means the Marginal Propensity to Consume (MPC) is 1 - MPS = 2/3. The multiplier is 1/(1-MPC) = 1/(1-2/3) = 3. A $200 increase in net exports will increase real GDP by 3 * $200 = $600.

If the MPS Is 1/3, a $200 Increase in Net