Given below are some statements. Read them carefully and choose the correct statement (s) from the given options.

Statement 1: The open economy multiplier is smaller than closed economy multiplier.  

Statement 2: The concept of marginal propensity to import is analogous to the marginal propensity to consume.

Both statements are correct.

the correct answer is option 3: Both statements are correct.

Statement 1: The open economy multiplier is smaller than closed economy multiplier. This is true. In an open economy, imports increase with income, which means that a portion of the spending leaks out of the domestic economy. This reduces the overall impact of an initial change in spending on the national income compared to a closed economy, where no such leakage occurs. Therefore, the multiplier effect is typically smaller in an open economy than in a closed economy.

Statement 2: The concept of marginal propensity to import is analogous to the marginal propensity to consume. This is also true. The marginal propensity to import (MPM) and the marginal propensity to consume (MPC) both describe how additional income is allocated. The MPC represents the fraction of additional income spent on domestic goods and services, while the MPM represents the fraction of additional income spent on imports. Both are measures of how changes in income affect consumption and spending.