When there is a shift in autonomous expenditure, why is there a multiple expansion of income and real GDP? Trace the multiplier effect through the first four rounds when there is an increase in autonomous expenditure of $40 billion and the marginal propensity to consume is 0.75.

What will be an ideal response?

There is a multiple expansion of income and real GDP because one person's spending becomes another person's income who, in turn, spends and creates more income. The initial increase in autonomous spending will create $40 billion in additional income. Resource owners will spend 75 percent (MPC = 0.75) of their gain in income or $30 billion. This creates $30 billion in income from which consumers will spend $22.5 billion. In turn, this $22.5 billion in new income creates $16.88 billion in new spending. In the next round $16.88 billion in new income will create $12.66 billion in new spending.