Assertion (A): An autonomous rise in import demand lowers equilibrium income in an open economy.
Reason (R): The open economy multiplier is smaller than the closed economy multiplier.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): An autonomous rise in import demand lowers equilibrium income in an open economy. — True. More imports mean less demand for domestic output, so income falls.
Reason (R): The open economy multiplier is smaller than the closed economy multiplier. — True. Since m is above zero, 1/(1 − c + m) is smaller than 1/(1 − c).
Why R does not explain A?
R tells us how large any change in income will be. It does not tell us the direction of the change, which is what A is about.
The real reason for A: autonomous imports enter autonomous expenditure with a minus sign. A rise in them is a fall in demand for domestic goods, and the multiplier then lowers income by a multiple of that fall.
NCERT (2026-27): “DETERMINATION OF EQUILIBRIUM INCOME IN OPEN ECONOMY … The second term in equation (6.10) shows that, in addition to the elements for a closed economy, autonomous expenditure for an open economy includes the level of exports and the autonomous component of imports. Thus, the changes in their levels are additional shocks that will change equilibrium income.” “An increase in demand for our exports is an increase in aggregate demand for domestically produced output and will increase demand just as would an increase in government spending or an autonomous increase in investment. In contrast, an autonomous rise in import demand is seen to cause a fall in demand for domestic output and causes equilibrium income to decline.” “… Since m, the marginal propensity to import, is greater than zero, we get a smaller multiplier in an open economy. …” |