Explain how an increase in injections may generate multiple increases in an economy’s GDP

AQA A-Level Economics Paper 2 June 2019

Extract B (lines 8–9) states ‘If injections into an economy’s circular flow of income increase, then this may generate multiple increases in GDP.’

With the help of a diagram, explain how an increase in injections may generate multiple increases in an economy’s GDP. (9 marks)

1. GDP is the value of goods and serviced produced in an economy, usually in a year.
2. The multiplier effect happens when an increase in aggregate demand (AD) leads to further increases in AD.

1. For example, the UK government might choose to reduce income taxes.
2. Initially, this leads to an increase in disposable incomes.
3. This causes an increase in consumption (C) causing an initial increase in AD.
4. Then, businesses anticipate that they will reach closer to capacity. They may also have higher business confidence.
5. This causes them to increase spending on capital goods; investment (I).
6. This is another component of AD so AD increases further.
7. Overall, an initial injection causes GDP to increase by even more than the original amount, as shown by the diagram below, from y1 to y3.

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