China, Japan, and South Korea are all feeling the pain of the U.S. recession. Ja

Question

China, Japan, and South Korea are all feeling the pain of the U.S. recession. Japanese exports are down 35 percent in December, compared to last year. Companies like Sony and Toyota report especially heavy declines in U.S. sales. China’s export growth has also slowed abruptly, cutting its GDP growth rate to 9 percent in 2008, down from 13 percent in 2007. South Korea has fallen into a recession of its own, with GDP down 3 to 4 percent from last year. The sharp contraction in the U.S. economy has rippled across the global economy, hitting export-dependent Asian nations particularly hard.

Source: News accounts, January 2009.

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?

China, Japan, and South Korea are all feeling the pain of the U.S. recession. Japanese exports are down 35 percent in December, compared to last year. Companies like Sony and Toyota report especially heavy declines in U.S. sales. China’s export growth has also slowed abruptly, cutting its GDP growth rate to 9 percent in 2008, down from 13 percent in 2007. South Korea has fallen into a recession of its own, with GDP down 3 to 4 percent from last year. The sharp contraction in the U.S. economy has rippled across the global economy, hitting export-dependent Asian nations particularly hard.

Source: News accounts, January 2009.

Explanation / Answer

Here, MPC = 0.75

So, MPS = 1 - MPC = 1 - 0.75 = 0.25

Multiplier = 1 / MPS = 1 / 0.25 = 4

If Korean exports to the United States decline by $15 billion, then cumulative Korean spending will drop by $60 billion (i.e. $15 * 4 = $60)

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