If c = 0.8 and m = 0.3, calculate closed economy multiplier.

The correct answer is Option (1) → 5

Given:

Marginal propensity to consume, c = 0.8

Marginal propensity to import, m = 0.3

A closed economy has no imports, so m plays no part. Its multiplier depends on c alone.

\( \displaystyle \text{Closed economy multiplier} = \frac{1}{1 - c} \)

\( \displaystyle = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5 \)

Option (3) 2 — this is 1/(1 − 0.8 + 0.3), the open economy multiplier.