When income increases by 10, consumption expenditure goes up by (0.8)10 since people spend 0.8 (= MPC) fraction of their additional income on consumption. Hence, in the next round, aggregate demand in the economy goes up by (0.8)10 and there again emerges an excess demand equal to (0.8)10.

Therefore, in the next production cycle, producers increase their planned output further by (0.8)10 to restore equilibrium. When this extra output is distributed among factors, the income of the economy goes up by (0.8)10 and consumption demand increases further by (0.8)210, once again creating excess demand of the same amount.

This process goes on, round after round, with producers increasing their output to clear the excess demand in each round and consumers spending a part of their additional income from this extra production on consumption items-thereby creating further excess demand in the next round.

In order to nd out the total increase in output of the nal goods, we must add up the infinite geometric series in the last column, i.e. 

10 + (0.8)10 + (0.8)210 + ……… ∝ 

= 10(1 + (0.8) + (0.8)2 + ……….. ∝} 

= 10/1 – 0.8 = 50 

The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of nal goods output to the initial increment in autonomous expenditure is called the output multiplier of the economy.