If c is the marginal propensity to consume and m is the marginal propensity to import, the open economy multiplier is:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 1/(1 − c + m)
In an open economy, part of every extra rupee of income is spent on imports. This is an extra leakage, so m is added to the leakages in the denominator: the multiplier is 1/(1 − c + m).
Since m is above zero, this multiplier is smaller than the closed economy multiplier 1/(1 − c). With c = 0.8 and m = 0.3, the two are 2 and 5.
NCERT (2026-27): “DETERMINATION OF EQUILIBRIUM INCOME IN OPEN ECONOMY … In both equations, equilibrium income is expressed as a product of two terms, the autonomous expenditure multiplier and the level of autonomous expenditures. We consider how each of these change in the open economy context. Since m, the marginal propensity to import, is greater than zero, we get a smaller multiplier in an open economy. It is given by”
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