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With c = 0.8 and m = 0.05, the open economy multiplier 1/(1 - c + m) equals what?
A5
B2.5
C4
D1.25
Answer & Solution
Correct answer: C. 4
The denominator is 1 minus 0.8 plus 0.05 which is 0.25, so the multiplier is 4, smaller than the closed economy 5.
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