If c (marginal propensity to consume) = 0.8 and m (marginal propensity

1.	If c (marginal propensity to consume) = 0.8 and m (marginal propensity to import) = 0.3, 1. Find the open and closed economy multiplier 2. If domestic autonomous demand increases by 100, nd the output level in a closed and an open economy.
Answer» 1. Closed economy multiplier \(\frac{1}{1-c}\) = \(\frac{1}{1-0.8}\) = \(\frac{1}{0.2} = 5\) Open economy multiplier \(\frac{1}{0.5} = \frac{1}{1-0.8+0.3} = \frac{1}{1-0.5} = \frac{1}{0.5}\) = 2 2. If domestic autonomous demand increases by 100, in a closed economy output increases by 500 whereas it increases by only 200 in an open economy.

If c (marginal propensity to consume) = 0.8 and m (marginal propensity to import) = 0.3, 1. Find the open and closed economy multiplier 2. If domestic autonomous demand increases by 100, nd the output level in a closed and an open economy.

Answer»

1. Closed economy multiplier

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

Open economy multiplier

\(\frac{1}{0.5} = \frac{1}{1-0.8+0.3} = \frac{1}{1-0.5} = \frac{1}{0.5}\) = 2

2. If domestic autonomous demand increases by 100, in a closed economy output increases by 500 whereas it increases by only 200 in an open economy.