Which of the following macroeconomic phenomena explains why an autonomous increase in investment expenditure generates a magnified final increase in aggregate income?

💡 Solution & Explanation

The multiplier effect demonstrates how an initial injection of investment generates a cumulative expansion in total national income that exceeds the initial amount, driven by the marginal propensity to consume. When recipients spend a portion of their newly acquired income, it becomes another person's earnings, creating a continuous circulation loop. The magnitude of this effect depends directly on the marginal propensity to consume, where a higher propensity yields a larger multiplier. John Maynard Keynes formalized this foundational concept to explain demand-driven economic fluctuations.