KEYNESIAN THEORY AND POLICY AT A GLANCEDERIVATION OF THE INVESTMENT MULTIPLIERThe notion of an investment multiplier is most relevant when (1) the economy is functioning somewhere belowits full-employment level and (2) market forces, which normally impinge on prices, wages and the interest rate,are (for some reason) not working. In these circumstances, a (Keynesian) macroeconomic equilibrium (oneinvolving a substantial amount of economywide unemployment) is achieved through changes in the levels ofspending and income. When the level of investment increases by some amount, ÄI, the equilibrium level of income will increaseby some multiple amount, ÄY. The ratio of ÄY to ÄI is called the investment multiplier. It can be derived, asfollows, from the equilibrium condition (Y = C + I + G) together with the consumption equation (C = a + bY).1. Y = C + I + G where C = a + bY 2. Y = a + bY + I + G3. Y + ÄY = a + b(Y + ÄY) + I + ÄI + G4. Y + ÄY = a + bY + b ÄY + I + ÄI + G5. Y = a + bY + I + G_________________________________________6. ÄY = b ÄY + ÄI7. ÄY - b ÄY = ÄI8. (1 - b)ÄY = ÄI9. ÄY = ÄI or 10.