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