SELECT * FROM question_mgmt as q WHERE id=5452 AND status=1 SELECT id,question_no,question,chapter FROM question_mgmt as q WHERE courseId=3 AND subId=59 AND chapterId=607 and ex_no='1' AND status=1 ORDER BY CAST(question_no AS UNSIGNED)

Question:

Why is the open economy autonomous expenditure multiplier smaller than the closed economy one?

Answer:

In case of a closed economy, equilibrium level of income is given by

Y = C + cY + I + G
Or, Y - cY = C + I + G
Or, Y (1 - c) = C + I + G


Or, 

Let, (C + I + G) = A1

In the case of an open economy, equilibrium level of income is given by

Y = C + cY + I + G + X - M - mY
Or, Y - cY - mY = C + I + G + X
Or, Y (1 - c - m) = C + I + G + X

Let autonomous expenditure (A2) = C + I + G + X
Comparing equations (1) and (2) and the denominators of the two multipliers, we can conclude that the multiplier in an open economy is smaller than that in a closed economy, as the denominator in an open economy is greater than the denominator in a closed economy.
 


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