The value of the foreign trade multiplier equals the reciprocal of the sum of the marginal propensities to:
A) Save plus import
B) Import plus invest
C) Consume plus export
D) Save plus import.

Question

Quizplus · Accepted Answer

The foreign trade multiplier equals the reciprocal of the sum of the marginal propensities to save and import. This is because the foreign trade multiplier measures the impact of an increase in exports on national income. An increase in exports will lead to an increase in income, which will then lead to an increase in saving and imports. The marginal propensity to save is the proportion of additional income that is saved, and the marginal propensity to import is the proportion of additional income that is spent on imports. The sum of the marginal propensities to save and import is the proportion of additional income that is not spent on domestic goods and services. Therefore, the foreign trade multiplier is equal to the reciprocal of the sum of the marginal propensities to save and import.

The Value of the Foreign Trade Multiplier Equals the Reciprocal