Multiplier and accelerator theory essay

The multiplier Multiplier The multiplier refers to the phenomenon whereby a change in an injection of expenditure either investment, government expenditure or exports will lead to a proportionately larger change or multiple change in the level of national income i.

Multiplier and accelerator theory essay

Multiplier and accelerator

Interaction Multiplier and accelerator theory essay Multiplier and Accelerator Business Cycle Article Shared by Read this article to learn about the interaction between multiplier and accelerator in business cycle. We have examined the working of the Multiplier and Acceleration principles separately.

The principle of acceleration has attained more importance in cyclical theory by its alliance with the multiplier principle. The interaction of the accelerator with the multiplier is capable, under certain circumstances, of generating continuous cyclical fluctuations.

Hansen have made fairly successful attempts to integrate the two parallel concepts and have introduced certain remarkable improvements. Neither the multiplier nor the accelerator taken alone can act.

In fact, the two tools combine in a series of endless possibilities, depending on the values of the accelerator and the magnitude of the multiplier.

Multiplier and accelerator theory essay

In other words, the relationship can be expressed as follows: The process is super-cumulative because one initial increase or decrease will set off a snowball effect where income and investment interact to magnify the impact at each successive level.

It is, therefore, quite interesting and useful to analyze the combined effects of multiplier and accelerator on national income propagation. Multiplier and Acceleration Effects of Income: In the first period there is an initial outlay of Rs.

Hence, the total rise in national income in the first period is Rs. Similarly, in the third period, we get induced consumption of Rs. Thus, total income in the fourth period has reached the peak level of Rs.

Then, in the fifth period, the total income starts falling and falls to rock bottom level of — 1. The result is quite a moderate type recurring cycle which repeats itself indefinitely. This shows that mpc of less than unity gives an answer to the question: Why does the cumulative process come to an end before a complete collapse or before full employment?

Hansen says that the rise in income progressively slowed down on account of a large part if the increase in income in each successive period is not spent on consumption.

Multiplier and accelerator theory essay

This results in a decline in the volume of induced investment and when such a decline exceeds the increase in induced consumption, a decline in income sets in. Thus, when we study the results of leverage effects or the interaction of multiplier and acceleration coefficients, we find that the level of income will be subject to various types of fluctuations depending on the values of acceleration and the multiplier.

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The curve a to b and b to c shows the ordinary process of income propagation total leverage effects as a result of multiplier and accelerator interaction during 5 periods. The income rises to its peak up to Rs. This is because the rate of increase of induced consumption goes on g 40 — increasing from period 1 to 4, acceleration effects work g in conjunction with the multiplier to push up the level of income.

However, income falls in the period 5 from b to c since the rate of increase in induced consumption 2 falls. But income and investment will not keep on going higher and higher indefinitely because two forces work to cause an eventual leveling off.

Firstly, the mps and other leakages like taxes reduce the rate of growth of consumption at each stage until the consumption finally ceases to increase at all.

Secondly, the initial increase in an autonomous investment soon exhausts itself, because as the capital stock grows during expansion, the MEC is likely to fall till investment is no longer profitable.

Thus, while the interaction of the multiplier and accelerators magnifies economic expansion, it also acts to set its own limits through the eventual reduction of consumption and autonomous investment.This is known as the multiplier effect - the multiplier is explained in our short revision video below.

Quizlet revision resource on the multiplier and the accelerator effects. Theory of the Firm Example Essays (Volume 1) for A Level Economics.

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Multiplier-Accelerator: Introduction

the theory of acceleration and the theory of multiplier are the two sides of the theory of fluctuations such as the theory of demand and the theory of supply are the two sides of the theory of value.

During the down swing the multiplier accelerator mechanism sets in reverse. Read this article to learn about the interaction between multiplier and accelerator in business cycle.

We have examined the working of the Multiplier and Acceleration principles separately. The principle of acceleration has attained more importance in cyclical theory by its alliance with the multiplier principle. Understanding the Accelerator Effect. Levels: AS, A Level, IB; Exam boards: AQA, Edexcel, OCR, IB, Eduqas The accelerator theory suggests that the level of net investment will be determined by the rate of change of national income.

There will then be an interaction between the multiplier and the accelerator that may cause larger. The accelerator theory suggests that the level of net investment will be determined by the rate of change of national income. If national income is growing at an increasing rate then net investment will also grow, but when the rate of growth slows net investment will fall.

Multiplier & Accelerator Effects Introduction In this chapter we. The accelerator theory suggests that the level of induced investment will be determined by the rate of change of national income (and not interest rate). When national income is rising rapidly, then known as the combined multiplier/ accelerator effect and can explain.

Keynes' Theory of Investment Multiplier (With Diagram)