Use the graph below to explain the relationship between investment and the multiplier. Increases in investment are in $20 billion shifts. The slope of the aggregate expenditure curve is 0.75.

The graph shows that a small shift in investment, possibly due to a change in expected returns or the interest rate, causes a large shift in GDP. Looking at the graph, a decrease in investment by $20 billion dollars from (C+I) to (C+I)2 causes a decrease in GDP of $80 billion. Conversely, an increase in investment from (C+I) to (C+I)1 causes an increase in GDP of $80 billion (from $580 billion to $500 billion). Given that the slope of the aggregate expenditures curve is 0.75, we know that the marginal propensity to consume is also 0.75. Using the equation to calculate the multiplier (1/(1 ? MPC)) we find the multiplier to be 4. We can also find this using our results from the shifts in investment, dividing the change in GDP by the change in investment (80/20 = 4). We also know that the marginal propensity to save is .25, meaning that an $80 billion increase in income causes a $20 billion increase in savings. This increase in savings helps bring the economy back in equilibrium, where savings equals investment and C+I=GDP.