Question

Why does equilibrium output increase as the marginal propensity to consume increases?

Short answer

Increase in Marginal Propensity to consume leads to higher consumption levels, & latter is a part of Aggregate Demand. Rise in AD increases equilibrium output.

Step-by-step solution

Step 1. Introduction

Marginal Propensity to consume denotes the proportion of additional income spent on consumption, as a ratio of change in consumption to change in expenditure.

Aggregate Demand is the total amount of expenditure, all sectors of economy are planning to incur during a period of time. It comprises of households' consumption expenditure.

Equilibrium is determined where Aggregate Demand = Aggregate Supply

Detail Explanation 

Increase in Marginal propensity to consume increases the consumption expenditure, rotates the consumption & consequently the AD curve upwards.

Higher level of Aggregate Demand implies that Aggregate Demand & Aggregate Supply are equal at a higher level of output & income. Hence, the equilibrium output increases.