Question

The increase in equilibrium income is more than proportionate to the initial increase in autonomous expenditure because of:

Options

• A decline in aggregate demand over successive rounds

• The multiplier mechanism operating through repeated rounds of income, consumption and output

• A simultaneous fall in the marginal propensity to save

• The operation of indirect taxes and subsidies

Answer 1

An initial increase in autonomous expenditure raises income, which raises consumption (since MPC > 0), which in turn raises aggregate demand and output again. These repeated rounds of income, consumption and output make the total income increase larger than the initial expenditure increase.