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The equilibrium output in economy also determines level of employment, given quantities of other factors of production. This means that level of output determined by equality of Y with AD does not necessarily mean level of output at which everyone is employed. The full-employment level of income is that level of income where all factors of production are fully employed in production process. The equilibrium attained at point of equality of Y and AD by itself, does not signify full-employment of resources. Equilibrium only means that if left to itself, level of income in economy will not change even when there is unemployment in economy. The equilibrium level of output may be more or less than full-employment level of output. If it is less than full-employment of output, it is due to fact that demand is not enough to employ all factors of production; this leads to decline in prices in long run. On other hand, if equilibrium level of output is more than full-employment level, it is due to fact that demand is more than level of output produced at full-employment level; this leads to rise in prices in long run. The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy.

What is the expression for the investment multiplier?

Solution

✅ Correct Option: 3

The investment multiplier is the ratio of the total increment in equilibrium output to the initial increment in autonomous expenditure. It equals ΔYΔA=11−c\frac{\Delta Y}{\Delta A} = \frac{1}{1-c}, where cc is the marginal propensity to consume. Among the options, 11−c\frac{1}{1-c} is the standard expression.

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