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

The correct answer is Option 1: 5

The closed economy multiplier = ∆Y /∆ $\overline{A}$ = 1 / (1- c )


                                                   = 1 / (1-0.8)

                                                   = 1 /0.2

                                                   = 5

The open economy multiplier = ∆Y /∆ $\overline{A}$ = 1 / (1- c + m)


                                                 = 1/(1 - 0.8 + 0.3)

                                                 = 1/0.5

                                                 = 2

Here, m = marginal propensity to import

Since m, the marginal propensity to import, is greater than zero, we get a smaller multiplier in an open economy.