Macroeconomics: Theory and Policy

6

Shifts in the Aggregate Demand and the Multiplier

After studying this topic, you should be able to understand

• A shift in the aggregate demand function results in a change in the equilibrium income or output. The ratio of the change in income is a multiple of the change in the investment.
• The concept of the investment multiplier.
• The importance of the multiplier in planning economic growth.
• The existence of certain limitations prevents the multiplier from working.
• The multiplier may not always work, especially in the LDCs.
• If the whole economy saves more, the economy’s income and output may decrease.

INTRODUCTION

In Chapter 5, we had focused on the determination of equilibrium income and output in a simple two sector economy. In this chapter, ...