CA Foundation P4 · Chapter 5 · Question 12 of 15
In an open economy, MPC = 0.8 and the marginal propensity to import = 0.05 (with no taxes). The open-economy multiplier is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 4
Explanation
Open-economy multiplier = 1/(MPS + MPM) = 1/(0.2 + 0.05) = 1/0.25 = 4. Imports are a leakage, so the multiplier is smaller than the closed-economy value of 1/0.2 = 5. 20 is 1/MPM alone.
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