Assume a simple model with no government or foreign sector.If an increase in autonomous investment of 100 leads to an increase in consumption of 300, the size of the expenditure multiplier is

Question

Quizplus · Accepted Answer

The expenditure multiplier is calculated as the ratio of the change in total output (or income) to the change in autonomous investment. Here, an increase in investment of 100 leads to an increase in total output (consumption in this case) of 300. The multiplier is thus 300 / 100 = 3. However, the correct interpretation of the multiplier effect includes the initial investment as part of the total increase in output, making the total increase 400 (100 initial investment + 300 increase in consumption). Therefore, the multiplier is 400 / 100 = 4.

Assume a Simple Model with No Government or Foreign Sector