Countries O and C are identical in all aspect except that O is an open economy while C is a closed e...........

Economics- Phase (I & II) National Income Accounting

Countries O and C are identical in all aspect, except that O is an open economy while C is a closed economy. The government in both countries decide to increase spending. Assume that prices are fixed. How does the resulting change in GDP differs.

GDP increases in C but decreases in O

GDP increases in both countries, but more so in O

GDP increases in both countries, but more so in C

GDP increases in both countries, by the same amount

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Explanation:

To analyze this , think about the goods market. The domestic demand schedule Z=I+C+G, is steeper than ZZ=I+C+G+X-IM/_E, the corresponding schedule in the open economy. This is because import increases with output, ultimately reducing the multiplier effect.