Which of the following defines the government purchases multiplier in an open economy?
A) 1/MPC + MPI
B) 1/(1 - MPC - MPI)
C) MPC/(1 - MPC)
D) (1 - MPC)/MPC

Question

Quizplus · Accepted Answer

The government purchases multiplier in an open economy measures the change in equilibrium output resulting from a change in government purchases. It is calculated as 1/(1 - MPC - MPI), where MPC is the marginal propensity to consume and MPI is the marginal propensity to import. This formula takes into account the fact that an increase in government purchases may lead to an increase in imports, which reduces the overall effect on output. Therefore, option B is the correct answer as it incorporates both MPC and MPI.

Which of the Following Defines the Government Purchases Multiplier in an Open