To calculate the multiplier, we divide by
A. equilibrium expenditure, the change in autonomous expenditure
B. the change in equilibrium expenditure, the change in autonomous expenditure
C. equilibrium expenditure, autonomous expenditure
D. the change in equilibrium expenditure; autonomous expenditure
The correct answer and explanation is :
The correct answer is B. the change in equilibrium expenditure, the change in autonomous expenditure.
Explanation:
The multiplier is a key concept in Keynesian economics that measures the effect of a change in autonomous expenditure on the total output (or GDP) of an economy. To understand this better, let’s break it down:
- Autonomous Expenditure: This refers to expenditure that is not influenced by the current level of national income. It includes things like government spending, investment by businesses, and exports. Autonomous expenditure is considered “exogenous,” meaning it is determined outside the economic model.
- Equilibrium Expenditure: This refers to the total expenditure in the economy, including both autonomous expenditure and induced expenditure. Induced expenditure changes as a result of changes in national income. The equilibrium level of expenditure is where total expenditure equals total output (or income) in the economy.
- The Multiplier: The multiplier measures how a change in autonomous expenditure impacts the equilibrium level of output (or income) in the economy. If autonomous expenditure increases, national income will increase by more than the initial change in spending due to the induced effects. The multiplier reflects this amplification effect.
The formula for the multiplier (often denoted as ( k )) is:
[
k = \frac{\Delta Y}{\Delta A}
]
Where:
- ( \Delta Y ) is the change in equilibrium output or income,
- ( \Delta A ) is the change in autonomous expenditure.
This formula shows that the multiplier is the ratio of the change in equilibrium output (( \Delta Y )) to the change in autonomous expenditure (( \Delta A )).
In simple terms, when autonomous expenditure (like government spending or investment) changes, it will lead to a larger change in equilibrium income/output due to the induced effects. The multiplier tells us how much total income increases for each dollar of autonomous spending.
Thus, option B is correct because it expresses that the multiplier is the change in equilibrium expenditure divided by the change in autonomous expenditure.