Question

The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is known as the:

Options

• Investment multiplier of the economy

• Marginal propensity to consume

• Aggregate demand of the economy

• Marginal propensity to save

Answer 1

The investment multiplier measures how many times the equilibrium income (value of final goods output) rises relative to the initial rise in autonomous expenditure, expressed as \[\frac{\Delta Y}{\Delta \bar{A}}=\frac{1}{1-c}=\frac{1}{s}\]. A small autonomous spending increase generates a proportionately larger total income increase through repeated rounds of spending.