Question

Which is larger, the multiplier of open economy or the multiplier of closed economy?

• A. Multiplier of open economy
• B. Multiplier of closed economy
• C. Both are equal
• D. None of these

Hint:

The multiplier effect is greater in an open economy because exports create additional income and demand, further boosting economic output.

Answer 1

The Correct Option is A

Step 1: Understanding the multiplier effect.
The multiplier effect refers to the change in income resulting from an initial change in expenditure. In an open economy, the multiplier is larger than in a closed economy because an open economy also includes exports, which can further increase total output. The presence of foreign trade adds to the multiplier effect, as spending on exports leads to more income.

Step 2: Analyzing the options.
(A) Multiplier of open economy: Correct. The multiplier of an open economy is larger because exports contribute to the increase in income and output.
(B) Multiplier of closed economy: This is incorrect, as the multiplier in a closed economy is smaller because it only considers domestic expenditure.
(C) Both are equal: This is incorrect because the multiplier of an open economy is typically larger due to the additional effect of exports.
(D) None of these: This is incorrect because the correct answer is (A).

Step 3: Conclusion.
The multiplier of an open economy is larger than that of a closed economy due to the additional impact of exports. Therefore, the correct answer is (A) Multiplier of open economy.