Autonomous Expenditure and Equilibrium: Understanding the Multiplier Effect

In economics, the concept of the multiplier effect plays a significant role in understanding how changes in autonomous expenditure can impact equilibrium expenditure and real GDP. The multiplier effect refers to the phenomenon where an initial change in spending results in a magnified effect on overall economic activity.

When there is an increase in autonomous expenditure, such as government spending or investment, it can lead to a chain reaction of higher levels of spending throughout the economy. This initial increase in spending creates income for households and businesses, which in turn leads to further spending and ultimately a higher level of equilibrium expenditure.

The multiplier effect is captured by the formula: change in real GDP = multiplier × change in autonomous spending. The multiplier represents the factor by which a change in autonomous expenditure affects equilibrium expenditure. In the given scenario, a $48 billion increase in autonomous expenditure results in a $60 billion increase in equilibrium expenditure, indicating a multiplier of 1.25.

Understanding the multiplier effect is essential for policymakers and economists to predict the impact of changes in autonomous expenditure on overall economic output. By analyzing the relationship between autonomous and equilibrium expenditure, decision-makers can formulate effective fiscal and monetary policies to promote economic growth and stability.