Multiplier and Accelerator Theory
MULTIPLIER AND ACCELERATOR THEORY
The Keynesians, have offered a demand side explanation of the business cycle. According to them, the fluctuations in output and employment in the country are caused by fluctuations in aggregate demand. The ups and downs in aggregate demand are caused by changes in the volume of investment. The volume of investment is directly related to the marginal efficiency of capital. The investment increases in response to higher marginal efficiency of capital and decreases with the fall in the profit expectations of the entrepreneurs. The Keynesians further put forward the theory of multiplier which shows how the increase or decrease in investment causes multiplied changes in income and employment and thus heightens a boom or deepens a depression. The Keynesians failed as they did not explain the cyclical nature of the ups and downs in business cycle. J. R. Hicks and Professor Samuelson put forward a new theory of business cycle named as Multiplier and Accelerator Theory of business cycle. Multiplier and Accelerator Theory According to J. R. Hicks and Samuelson, the multiplier alone cannot explain the cyclical nature of the business cycle. It is the interaction between the multiplier and accelerator that explains the emergence of different phases of business cycle. The multiplier tells us that a change in the level of autonomous investment brings about a relatively greater change in the level of national income. The accelerator theory states that the current investment spending depends positively on the expected future growth of real GDP. When real GDP growth is expected to be high, firms anticipate that their investment in plants and equipment will be profitable. They, therefore, increase their total investment spending. The concept of accelerator is not rival to the concept of multiplier. They are parallel concepts. The multiplier shows the effect of changes in autonomous investment to changes in income’ and employment. The accelerator
The Keynesians, have offered a demand side explanation of the business cycle. According to them, the fluctuations in output and employment in the country are caused by fluctuations in aggregate demand. The ups and downs in aggregate demand are caused by changes in the volume of investment. The volume of investment is directly related to the marginal efficiency of capital. The investment increases in response to higher marginal efficiency of capital and decreases with the fall in the profit expectations of the entrepreneurs. The Keynesians further put forward the theory of multiplier which shows how the increase or decrease in investment causes multiplied changes in income and employment and thus heightens a boom or deepens a depression. The Keynesians failed as they did not explain the cyclical nature of the ups and downs in business cycle. J. R. Hicks and Professor Samuelson put forward a new theory of business cycle named as Multiplier and Accelerator Theory of business cycle. Multiplier and Accelerator Theory According to J. R. Hicks and Samuelson, the multiplier alone cannot explain the cyclical nature of the business cycle. It is the interaction between the multiplier and accelerator that explains the emergence of different phases of business cycle. The multiplier tells us that a change in the level of autonomous investment brings about a relatively greater change in the level of national income. The accelerator theory states that the current investment spending depends positively on the expected future growth of real GDP. When real GDP growth is expected to be high, firms anticipate that their investment in plants and equipment will be profitable. They, therefore, increase their total investment spending. The concept of accelerator is not rival to the concept of multiplier. They are parallel concepts. The multiplier shows the effect of changes in autonomous investment to changes in income’ and employment. The accelerator