Answer to Question #217423 in Macroeconomics for Tammy

Question

Using Keynesian cross demonstrate how investment multiplier leads to growth of output. (5 marks)

Answer 1

Solution:

The Keynesian cross model displays how the level of aggregate expenditure varies with the level of economic output. The Keynesian investment multiplier asserts that an increase in investment expenditure increases GDP or national income by more than the amount of the increase.

An increase in investment will shift the aggregate demand curve upward on the Keynesian cross, leading to an increase in income and growth of output. As a result of the increase in investment, the level of income increases by a multiple of it, hence the investment multiplier effect.