The closed economy multiplier is equal to _____________.
A)The reciprocal of the marginal propensity to save
B)The reciprocal of the marginal propensity to consume
C)The slope of the savings function
D)The ratio of savings to investment

Question

Quizplus · Accepted Answer

The closed economy multiplier is equal to the reciprocal of the marginal propensity to save. This is because in a closed economy without external trade, the multiplier effect is determined by how much of additional income is saved rather than spent. The marginal propensity to save (MPS) is the fraction of an additional dollar of income that is saved. The multiplier is 1/MPS.

The Closed Economy Multiplier Is Equal to _____________