Graphical Representation of the Upward Multiplier Process
The upward multiplier process can be visualized on a diagram with Output () on the horizontal axis and Aggregate Demand () on the vertical axis. The 45-degree line represents the equilibrium condition . Initially, the economy is at equilibrium at point , where the initial aggregate demand curve, , intersects the 45-degree line. A positive investment shock, such as a €2bn increase, causes the curve to shift upward in parallel to a new position, . This initial increase in demand is shown by the vertical move from point to . In response, firms increase production by €2bn to meet this demand, moving the economy horizontally from to on the 45-degree line. This higher income at induces further consumption, raising aggregate demand again (move from to ). This sequence of demand and production increases continues in successive rounds until the economy reaches a new, higher equilibrium at point . The total increase in output, represented by the horizontal distance between and , is €4bn, which is a multiple of the initial €2bn investment increase.
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Ch.3 Aggregate demand and the multiplier model - The Economy 2.0 Macroeconomics @ CORE Econ
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Graphical Representation of the Upward Multiplier Process
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Learn After
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