Final answer:
An initial government expenditure increase of $100 results in a direct increment of $100 in aggregate demand, but due to the multiplier effect, it leads to a much larger increase in aggregate expenditures, approximately $213, indicating a multiplier of 2.13 in the given example.
Step-by-step explanation:
If the government spends an additional $100 in an economy where the aggregate demand (AD) is represented by Consumption (C) + Investment (I) + Government spending (G) + (Exports (X) - Imports (M)), then the initial increase in AD would be by that exact amount, which is $100. However, due to the multiplier effect, the total increase in aggregate expenditures would be larger than the initial government spending.
As incomes increase because of the initial government spending, so does consumption. With the marginal propensity to spend being about 57 percent, the additional consumption generated after the injection of $100 would be 57 percent of that amount in the first round, leading to further rounds of increased consumption, albeit at diminishing rates.
Figure D10 illustrates the multiplier effect, showing that the original increase of government spending of $100 leads to a cumulative increase in aggregate expenditure of approximately $213 after several rounds of spending. This implies a multiplier of 2.13 ($213/$100).