The closed economy multiplier measures how an initial change in spending creates a larger final change in national income within an economy that does not trade with other countries.

Formula:

Closed economy multiplier = 1 / (1 − MPC + MRT)

Key features:

• A closed economy has no imports or exports; money flows only between households, businesses, and the government.
• The only leakages (money leaving the flow) are through saving and taxation.
• Because there are no payments for imports, this multiplier is usually larger than the multiplier in an open economy.
• It helps economists understand the domestic relationship between consumption, saving, taxes, and the total wealth of the nation.