Explain the determination of equilibrium national income and the multiplier effect.

1. 1 · Introduce the Keynesian model. In the short run with spare capacity, output is set by aggregate expenditure AE = C + I + G + (X − M).
2. 2 · Explain the consumption function. C = a + bY; MPC and MPS; MPC + MPS = 1.
3. 3 · Draw the Keynesian cross. [Diagram: 45° line and the AE line; equilibrium at their crossing; an upward shift of AE showing a larger rise in Y]
4. 4 · Show equilibrium with numbers. C = 200 + 0.8Y, I = 300, G = 200 → Y = 3,500; leakages 500 = injections 500.
5. 5 · Explain the multiplier process. Rounds of spending: 100 + 80 + 64 + … = 500; k = 1 ÷ (1 − MPC) = 5.
6. 6 · Open economy and limits.
   • Taxes and imports reduce k (example k = 2)
   • Time lags and capacity limits
   • Crowding out
7. 7 · Sri Lankan business link. Export orders for apparel and tea spread income through the economy, but import leakages reduce the effect.
8. 8 · Conclude. Equilibrium income depends on total spending, and changes in spending have magnified effects.

Scoring tip: Label the 45° line 'Y = AE'. Without it, the diagram has no meaning.