Keynesian multiplier and accelerator relationship

Multiplier and Accelerator - MA Economics Karachi University

keynesian multiplier and accelerator relationship

This "Relation" was the acceleration principle of investment. to explore the relationships between the Keynesian multiplier and accelerator-type investment. Further, by putting forward the theory of multiplier, Keynes has shown how the effect of The model of interaction between multiplier and accelerator can be. Multiplier and Accelerator. (Determination of National Income Continued). The Multiplier: Keynes' Multiplier Theory gives great importance to increase in public .

Autonomous investment is the investment undertaken due to the external factors such as new inventions in technology, production process, production methods, etc.

Multiplier and accelerator

While, the Derived Investment is the investment, particularly in capital equipment, is undertaken to meet the increase in consumer demand necessitating new investment.

With an increase in the autonomous investment, the income of people rises and the process of multiplier begins. With increased incomes, the demand for the consumer goods also increases depending on the marginal propensity to consume. And if the firm has no excess production capacity, then its existing capital will stand inadequate to meet the increased demand. Therefore, the firm will undertake new investment to meet the growing demand.

keynesian multiplier and accelerator relationship

Thus, an increase in consumption creates a demand for investment, and this is called as Derived Investment. This marks the beginning of the acceleration process. When the derived investment takes place, the income rises, in the same manner, it does when the autonomous investment took place.

With an increased income, the demand for the consumer goods also increases. This is how, the multiplier process and principle of acceleration interact with each other, such that income grows at a faster rate than expected.

In short, the exogenous factors external origin lead to autonomous investment, which results in the multiplier effect. This multiplier effect creates the derived investment, which results in the acceleration of investment.

Samuelson made the following assumptions in the analysis of this interaction process: There is no excess production capacity. The case of region E lies in between the two as the combinations of values of c and v in it are such that cause cyclical movements of income which neither move toward nor away from the equilibrium. It is worth noting that all the above five cases do not give rise to cyclical fluctuations or business cycles.

On the other hand, the values of c and v and therefore of multiplier and accelerator of the region B produce cyclical fluctuations which are of the type of damped oscillations that tend to disappear over time, that is, the amplitude of the cycles shrinks to zero over a period of time. However, this contradicts the historical experience which reveals that there is no tendency for the cyclical movements to disappear or die out over time. However, it is worth noting that the case B explains the impact of a single disturbance on income and employment.

For example, the effect of a onetime increase in autonomous investment goes on diminishing over time if no other disturbance takes place.

  • Samuelson’s Multiplier Accelera­tor Interaction Model
  • Multiplier-Accelerator Interaction Theory
  • Macroeconomics

However, in reality, further disturbances such as technological advances, innovations, natural disasters and man-made disasters such as security scam in India in do take place quite frequently and at random intervals and in a way they provide shocks to the system. Thus, the values of c and v of region B can generate cyclical fluctuations over time without dying out if the above-mentioned disturbances are occurring frequently at random.

Samuelson's Multiplier Accelera­tor Interaction Model

This results in business cycles whose duration and amplitude are quite irregular and not uniform. As a matter of fact, the business cycles in the real world also reveal such irregular pattern. But they are not consistent with the real world situation where oscillations do not become explosive.

However, the values of multiplier and accelerator falling within region C can be made consistent with the actual world situation by incorporating in the analysis the so called buffers. Buffers are the factors which impose upper limit or ceiling on the expansion of income and output on the one hand or impose a lower limit or floor on the contraction of output and income on the other.

With the inclusion of these buffers the otherwise explosive upward and downward fluctuations arising out of values of multiplier or MPC and accelerator or capital-output ratio of the region C can become limited cyclical fluctuations, characteristic of the real world situation.

Multiplier-accelerator model

However, the adequate explanation of the business cycles in this case would require the reasons why the system starts moving in the reverse direction, say, after striking the ceiling. Hicks in his famous theory of the business cycles provide the reasons which cause movement of the system in the reverse direction after it hits the ceiling or the floor as the case may be. Lastly, the case E represents a situation where the business cycles neither try to disappear, nor try to explode, they go on continually with constant amplitude.

keynesian multiplier and accelerator relationship

This however contradicts the real world situation and is quite impossible. This is because in the real world situation, business cycles differ a good deal in amplitude and duration.

We have explained the interaction of multiplier and accelerator in case of various values of marginal propensity to consume c and capital-output ratio v.

On the basis of the interaction of the multiplier and accelerator the two categories of business cycle theories have been put forward.

keynesian multiplier and accelerator relationship

One category of these business cycle theories assumes the values of multiplier and accelerator which generate explosive cycles. On the other hand, Hansen has propounded a business cycle theory based on the interaction of multiplier with a weak accelerator which produces only damped oscillations.

Samuelson’s Model of Business Cycles: Interaction between Multiplier and Accelerator

Further, as indicated above, the interaction theories have been modified either by incorporating in the analysis erratic shocks or random disturbances or by including so called buffers which check the upward movement of income and output by imposing ceiling of expansion and checking a downward movement by imposing a floor on the contraction of output. We discuss below his theory of business cycles in detail. Further, one period time lag has been assumed which implies that an increase in income in a period induces the increase in consumption in the next period.

Similarly, the changes in induced consumption and induced investment and hence in income brought about by the initial increase in autonomous investment of Rs. It will be seen from column 5 of the Table In this way we see that the interaction between the multiplier and accelerator can give rise to the cyclical movements of the economic activity and its various phases.

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