Question

prove that the open economy multiplier is the reciprocal of the sum of marginal propensity to save(mps) and marginal propensity to import (mpm).​

Answer 1

Answer:

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Explanation:

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Answer 2

Answer:

MPM represents proportion of increase in disposable income that is saved.

MPS represented proportion of increase in disposable income that is spent on imported goods.

Explanation:

Proof Explanation ::-

The open economy multiplier represents the magnitude of the increase in aggregate demand that results from an increase in autonomous spending (e.g. investment, government spending).

It is the reciprocal of the sum of marginal propensity to save (MPS) and marginal propensity to import (MPM).

The MPS represents the proportion of an increase in disposable income that is saved and not spent on domestic goods and services.

The MPM represents the proportion of an increase in disposable income that is spent on imported goods, rather than on domestic goods and services.

Therefore, the open economy multiplier is calculated as 1/(MPS + MPM). If the MPS is high and the MPM is low, a larger fraction of the increase in disposable income will be spent on domestic goods and services, leading to a larger increase in aggregate demand and a higher value for the open economy multiplier.

Conversely, if the MPS is low and the MPM is high, a smaller fraction of the increase in disposable income will be spent on domestic goods and services, resulting in a smaller increase in aggregate demand and a lower value for the open economy multiplier.

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