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