Question

Relative to the closed-economy multiplier, the open-economy multiplier is: Smaller because imports are an injection. Smaller because the marginal propensity to import, which is greater than zero, reduces the size of the multiplier. Larger because the leakage in the denominator of the multiplier is smaller. Larger because the marginal propensity to import is less than zero.

Answer 1

Answer: B- Smaller because the marginal propensity to import, which is greater than zero, reduces the size of the multiplier.

Open economy multiplier=

where MPS is marginal propensity to save and MPM is marginal propensity to import.

Closed economy multiplier=

While calculating the multiplier there is marginal propensity to import in an open economy which makes the denominator larger and multiplier smaller.

So the multiplier of the open economy is smaller than of closed economy.