Final answer:
The expenditure multiplier describes how an initial increase in investment spending leads to larger increases in GDP, which is critical for understanding the effectiveness of fiscal policy, such as the 2009 American Recovery and Reinvestment Act.
Step-by-step explanation:
When investment spending increases, the concept of the expenditure multiplier reflects the phenomenon that the initial spending leads to additional income and further spending, resulting in a cumulative impact on Gross Domestic Product (GDP) that is greater than the initial amount expended. This scenario is precisely illustrated in Figure 11.17, which shows how a vertical increase in expenditure from AEo to AE1 results in a clearly larger increase in equilibrium output on the horizontal axis.
The multiplier is a significant component in assessing the effectiveness of fiscal policy as it designates the extent to which economic activity can be stimulated by an autonomous increase in spending. For instance, the multiplier was a crucial factor when evaluating the outcomes of the Obama administration's fiscal stimulus package, the American Recovery and Reinvestment Act of 2009.