This scenario describes the Balanced Budget Multiplier. Even if the budget remains balanced, the increase in government spending has a larger impact on aggregate demand than the equivalent increase in taxes. This is because government spending enters the circular flow directly, whereas taxes reduce disposable income, which only partially reduces consumption. Consequently, the net effect is an increase in total output.

The accelerator theory posits that investment is a function of the rate of change in national income rather than the absolute level of income. When the economy grows, firms must increase their capital stock to meet rising demand, leading to induced investment. If the growth rate of income slows, investment may decline even if income is still rising, highlighting the sensitivity of capital expenditure to the pace of economic expansion.

The multiplier-accelerator model suggests that while output can fluctuate, it is constrained by the fact that gross investment cannot be negative (depreciation limits how much capital can be reduced). This creates a 'floor' for output, preventing it from falling indefinitely during a downturn, as the disinvestment process is limited by the physical depreciation of existing capital stock.

The multiplier is calculated as 1 / (1 - MPC). With an MPC of 0.75, the multiplier is 1 / (1 - 0.75) = 4. A change in autonomous investment of 20 million will therefore result in a total change in aggregate output of 20 million multiplied by 4, which equals 80 million. Since the investment is a reduction, the output decreases by 80 million.

An increase in government spending acts as an injection into the circular flow of income. Through the multiplier effect, this initial spending generates additional rounds of consumption. If the multiplier effect is stronger than the crowding-out effect (where higher interest rates reduce private investment), the aggregate demand curve will shift to the right by a magnitude greater than the initial injection.

The investment multiplier is defined as 1 divided by the marginal propensity to save (1/MPS). Since the MPS is in the denominator, any increase in the marginal propensity to save will result in a smaller multiplier value. This occurs because a higher savings rate means less money is re-spent in the economy, dampening the cumulative effect of initial investment on national income.

The simple expenditure multiplier is calculated as 1 / (1 - MPC). As the marginal propensity to consume (MPC) increases, the denominator (1 - MPC) decreases. Consequently, the overall value of the multiplier increases. This reflects the fact that a higher MPC means a larger portion of each additional dollar of income is spent, leading to a greater total impact on national income.

The multiplier effect describes how an initial injection of spending leads to a larger final increase in national income or output. It quantifies the relationship between the change in autonomous aggregate demand and the resulting change in total equilibrium output. Because one person's spending becomes another person's income, the multiplier demonstrates how a small shift in demand cascades through the economy, resulting in a magnified impact on total production.

The investment multiplier is calculated using the formula k = 1 / (1 - MPC). With an MPC of 0.9, the calculation is 1 / (1 - 0.9) = 1 / 0.1 = 10. The provided answer 'D' (0.1) is mathematically incorrect based on the standard multiplier formula. This suggests a potential error in the source answer key.

In an open economy, the multiplier effect is dampened by leakages, which are portions of income that are not spent on domestically produced goods. Imports represent a significant leakage because money spent on foreign goods does not circulate within the domestic economy. As the marginal propensity to import increases, the value of the multiplier decreases, leading to a smaller overall impact on national income from an initial injection of spending.