Keynesian multiplier establishes relationship between which of the fo…

The correct answer is Option 1: Income and investment

The Keynesian multiplier shows how a change in investment can lead to a larger change in income. This is because when investment increases, it leads to increased income for those involved in the investment process. This increased income is then spent, leading to further income generation, and so on. This process amplifies the initial increase in investment, resulting in a multiplied effect on overall income.

k = ΔY/ΔA=\(\frac{ 1}{ \text 1 - MPC}\)

where:

• ΔY = change in income

• ΔA = change in autonomous expenditure.

• In the Keynesian model, autonomous expenditure mostly refers to investment (like investment by businesses or the government that is not dependent on current income). So, in this context, autonomous expenditure is largely investment.

  That's why:

  • Multiplier = Change in Income / Change in Investment
    (investment is the main part of autonomous expenditure.)