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4 November, 15:41

If korean exports to the united states decline by $15 billion, by how much will cumulative korean spending drop if their mpc is 0.75?

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  1. 4 November, 15:44
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    Given:

    Change in exports: 15 billion

    MPC = 0.75

    MPC = Change in Consumption / Change in Disposable income

    MPS stands for Marginal Propensity to Consume while MPS stands for Marginal Propensity to Save.

    MPC + MPS = 1

    MPC = 1 - MPS

    MPS = 1 - MPC

    Spending Multiplier = 1/MPS

    Since MPC = 0.75 then MPS = 0.25

    Spending Multiplier = 1/0.25 = 4

    Change in Export * Spending Multiplier

    15 billion * 4 = 60 billion

    The cumulative Korean spending will drop by 60 billion.
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