Answer to Question #154153 in Macroeconomics for Gayathri

Question

In the simple Keynesian model, an increase of one dollar in autonomous expenditure will cause equilibrium income to increase by a multiple of this one dollar increase. Explain the process by which this happens using different approached of explanations.. 

Answer 1

It's referred to as the process of the multiplier.

According to the multiplier process, when autonomous expenditure increases this increases the level of output and income in the economy. As income increases consumption being the function of income also increases. This leads to a further increase in expenditures and this process will go on, which leads to an increase in output by more than the increase in autonomous expenditures.