In a closed economy, what would the value of the multiplier be if the marginal propensity to save is 0.25. Assume taxes are 20% and applied flatly as a proportion of income A. 4 B. 2.22 C. 5 D. 1.81 could someone please explain. The ans is B. From May'2011.
Since it is a closed economy there will be no imports Hence withdrawals will include savings and taxes,ie, 0.25+0.2=0.45 Mpw=0.45 k=1/mpw=1/0.45=2.22
