The government spending multiplier in an open economy will be __________ than the multiplier in a closed economy when the propensity to import is ____________.Group of answer choicessmaller, zerolarger, positivelarger, zeroequal, zero
Question
The government spending multiplier in an open economy will be __________ than the multiplier in a closed economy when the propensity to import is ____________.Group of answer choicessmaller, zerolarger, positivelarger, zeroequal, zero
Solution 1
The government spending multiplier in an open economy will be smaller than the multiplier in a closed economy when the propensity to import is positive.
Here's why:
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In an open economy, a portion of government spending goes towards imports. This means that not all of the government spending stays within the economy to stimulate further economic activity.
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The propensity to import refers to the likelihood that an increase in income will lead to an increase in imports. If the propensity to import is positive, it means that as income increases, imports also increase.
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Therefore, if the propensity to import is positive, a larger portion of government spending will go towards imports. This reduces the overall impact of government spending on the economy, making the multiplier smaller in an open economy compared to a closed economy.
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In a closed economy, all government spending stays within the economy, leading to a larger multiplier effect.
Solution 2
The government spending multiplier in an open economy will be smaller than the multiplier in a closed economy when the propensity to import is positive.
Here's why:
-
In an open economy, a portion of government spending goes towards imports. This means that not all of the government spending stays within the economy to stimulate further economic activity.
-
The propensity to import refers to the portion of additional income that is spent on imports. If this is positive, it means that as income increases, spending on imports also increases.
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Therefore, if the propensity to import is positive, a larger portion of government spending will go towards imports in an open economy compared to a closed economy.
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This reduces the overall impact of government spending on the economy, making the multiplier smaller in an open economy compared to a closed economy.
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