Graphic Presentation of Multiplier

Investment multiplier can also be explained with the help of the a diagram, as shown below:

investment multiplier

1) Income is shown along the X axis and Aggregate demand on Y axis.

2) The initial equilibrium is at point A, When AD = C + I

3) An increase in autonomous investment expenditure (∆I) shifts the desired spending function (AD) from AD to AD₁ i.e the curve shifts upwards.

Owing to injection (∆I), level of income increases from OJ to OK. Increase in income = JK. Compare it with the size of injection (∆I= EF), we see that increase in income is more than the size of injection (JK > EF).

Point B shows higher equilibrium when AD = C + I + ∆I. It shows the impact of injection (∆I).

4) A decrease in autonomous investment expenditure (∆I) shifts the desired spending function (AD) from AD to AD₂ i.e the curve shifts downwards.

Owing to withdrawal (-∆I), level of income decreases from OJ to OH. Decrease in income = JH. Compare it with the size of withdrawal (-∆I= EG), we see that decrease in income is more than the size of withdrawal (JH > EG).

Point C shows lower equilibrium when AD = C + I - ∆I. It shows the impact of withdrawal (-∆I).

This offers the conclusion that ‘injections’ and ‘withdrawals’ have multiplier effect on the level of output/ income.

While injections cause a positive multiplier effect, withdrawals cause a negative multiplier effect.