Calculating the Multiplier from an Investment Increase Example

Consider a standard macroeconomic model where the vertical axis represents aggregate demand and the horizontal axis represents output/income. The economy is initially at an equilibrium where the aggregate demand curve intersects the 45-degree line. If there is a sudden, sustained increase in autonomous investment, which statement best analyzes the immediate, subsequent effect that drives the multiplier process forward?

An economy is in equilibrium. Following a sudden, sustained increase in autonomous investment, arrange the subsequent events in the correct chronological order as they would occur on a standard 45-degree line diagram (where Aggregate Demand is on the vertical axis and Output/Income is on the horizontal axis).

Analyzing the Multiplier Effect on a 45-Degree Diagram

Consider a standard 45-degree line diagram where an economy is initially in equilibrium. Following a sustained increase in autonomous spending, the aggregate demand curve shifts upward. True or False: The economy immediately moves along this new, higher aggregate demand curve to reach the final, higher equilibrium output.

Analyzing the Production Response in the Multiplier Process