The marginal propensity to consume is 0.9 and the marginal propensity to import is 0.1. Which of the following statements are correct?
(A) The closed economy multiplier is 10.
(B) The open economy multiplier is 5.
(C) The open economy multiplier is larger, since imports add to demand.
(D) Imports per unit of income are an additional leakage at each round of the multiplier process.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
Given:
Marginal propensity to consume, c = 0.9
Marginal propensity to import, m = 0.1
\( \displaystyle \text{Closed economy multiplier} = \frac{1}{1 - c} = \frac{1}{0.1} = 10 \)
\( \displaystyle \text{Open economy multiplier} = \frac{1}{1 - c + m} = \frac{1}{1 - 0.9 + 0.1} = \frac{1}{0.2} = 5 \)
(A) The closed economy multiplier is 10. — Correct. As worked out above.
(B) The open economy multiplier is 5. — Correct. As worked out above.
(C) The open economy multiplier is larger, since imports add to demand. — Incorrect. Imports take demand away from domestic goods, so the open economy multiplier is smaller (5 against 10).
(D) Imports per unit of income are an additional leakage at each round of the multiplier process. — Correct. This leakage is why the multiplier is smaller.
NCERT (2026-27): “… The increase in imports per unit of income constitutes an additional leakage from the circular flow of domestic income at each round of the multiplier process and reduces the value of the autonomous expenditure multiplier.” |
