Question

An increase (decrease) in autonomous spending causes aggregate output of final goods to increase (decrease) by a larger amount due to ________.

• A. Ex ante consumption.
• B. Ex ante investment.
• C. Marginal efficiency of investment.
• D. Multiplier.

Hint:

Keynesian Multiplier: \(k = \frac{\Delta Y}{\Delta A}\).
Because \(MPC > 0\), the multiplier is strictly greater than 1, causing income to change by a larger amount than the initial autonomous expenditure change.

Answer 1

The Correct Option is D

Concept:
Any autonomous injection into the circular flow of income sets off a chain reaction of successive rounds of spending and income generation.
The economic mechanism responsible for this amplified effect is known as the Multiplier process.

Step 1: Mechanism of the Multiplier:
When autonomous expenditure (such as investment or government spending) changes by \(\Delta A\), output initially increases by that same amount.
This newly generated output turns into income for factor owners, who spend a fraction (\(MPC\)) of it on consumption.
This subsequent consumption becomes income for other producers, who again spend a portion on further goods.
The cumulative change in aggregate output (\(\Delta Y\)) across all rounds is a multiple of the initial change: \[ \Delta Y = \frac{1}{1 - MPC} \times \Delta A \]

Step 2: Conclusion:
The factor that magnifies changes in autonomous spending into larger changes in aggregate output is the Multiplier.
Final Answer:
The magnification occurs due to the Multiplier. Hence, option (D) is correct.