Graphical Picture of the Multiplier
Our discussion of the multiplier has relied up to now largely on common sense and arithmetic. Can we get the same result using our graphical analysis of saving and investment? The answer is yes. Suppose, as in Table 24-1, that the .HPSis 1.” and a burst of inventions gives rise to an extra S100 billion of continuing investment. “‘bat “ill be the new eqpilibrium GOP? If the multiplier is indeed 3, the answer is 53900 billion.
A look at Figure 24-4 can confirm this result. old investment schedule II is shifted upward by 5100 billion to the new level r I”. The new intersection point is E; -the increase in income is exactly 3 times’ the increase in investment. As the blue arrows show, the horizontal output distance is 3 times as great as the upward shift in the investment schedule. We know that desired Sewing must rise to equal the new and higher level of investment, The only way that saving can rise is for national income to rise. With and MPS of and an increase in investment of SI 00 billion. income must rise by S300 billion to bring forth S100 billion of additional saving to match the new investment. Hence, at equilibrium, $100 billion of additional investment induces $300 billion of additional income, verify our multiplier arithmetic.
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