Correct Option
A closed economy is a theoretical economic model where a country conducts no economic activity with outside economies. This implies that there are no exports of goods and services to other countries and no imports from them. All production and consumption occur within the domestic boundaries, making the economy self-sufficient and isolated from global trade and financial flows.
Incorrect Options
-
Option 1: The money supply is fully controlled. Control of the money supply is a function of a country's central bank and is a characteristic of monetary policy, not the defining feature of a closed economy. Monetary policy is implemented in both open and closed economies.
-
Option 2: Deficit financing takes place. Deficit financing refers to the government spending more than it earns, covering the difference by borrowing or printing money. This is a fiscal policy tool that can be employed by both open and closed economies and does not define the nature of an economy's international trade relations.
-
Option 3: Only exports take place. An economy that only exports but does not import is not a closed economy. A closed economy implies the complete absence of international trade. Furthermore, an economy solely engaged in exports without any imports is an unrealistic and unsustainable scenario in practice.