In a simple economy in which prices are constant and there are no income taxes or imports, the marginal propensity to save is 0.2. If exports increase $50, what impact will that have on aggregate expenditure?
A) increase by $250
B) increase by $100
C) decrease by $250
D) decrease by $100

Question

Quizplus · Accepted Answer

Given a marginal propensity to save (MPS) of 0.2, the marginal propensity to consume (MPC) is 1 - MPS = 0.8. An increase in exports of $50 leads to an initial increase in aggregate expenditure by $50. The multiplier effect, calculated as 1/(1-MPC) or 1/MPS, is 1/0.2 = 5. Therefore, the total increase in aggregate expenditure is $50 * 5 = $250.

In a Simple Economy in Which Prices Are Constant and There