Assume that an increase of $300 in exports leads to an increase of $750 in equilibrium income.If the marginal propensity to import equals 1/10, the marginal propensity to save must be _____.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as the change in income divided by the change in exports, which is $750/$300 = 2.5. The multiplier formula is 1/(MPS + MPM), where MPS is the marginal propensity to save and MPM is the marginal propensity to import. Given MPM = 0.1, we have 1/(MPS + 0.1) = 2.5. Solving for MPS gives MPS = 0.3.

Assume That an Increase of $300 in Exports Leads to an Increase