Consider a no government open economy. If the marginal propensity is 0.75 and the marginal propensity to import is 0.15, the multiplier will be:
A) 4.0.
B) 2.5.
C) 0.15.
D) None of the above.

Question

Quizplus · Accepted Answer

The multiplier in an open economy is calculated as 1 / (1 - MPC + MPM), where MPC is the marginal propensity to consume and MPM is the marginal propensity to import. Substituting the given values: 1 / (1 - 0.75 + 0.15) = 1 / 0.4 = 2.5.

Consider a No Government Open Economy