Which of the following statements is true?
A) The open-economy multiplier is smaller than the closed-economy multiplier for investment but larger for government spending.
B) The open-economy multiplier is smaller than the closed-economy multiplier for government spending but larger for investment.
C) The open-economy multiplier is smaller than the closed-economy multiplier for both government spending and investment.
D) The open-economy multiplier is larger than the closed-economy multiplier for both government spending and investment.
E) The open-economy multiplier is smaller than the closed-economy multiplier for government spending, but they are equal for investment.

Question

Quizplus · Accepted Answer

The open-economy multiplier is generally smaller than the closed-economy multiplier for both government spending and investment because in an open economy, some of the increase in income resulting from fiscal expansion is spent on imports, which does not contribute to the domestic economy's income. This leakage into imports reduces the multiplier effect compared to a closed economy where all spending is assumed to remain within the domestic economy.

Which of the Following Statements Is True