105-Accelerator_Revision_Worksheet - IB Economics...

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Unformatted text preview: IB Economics Accelerator Revision Worksheet www.tutor2u.com This is a small topic area that is usually taught immediately after the multiplier. (Exam questions tend to ask about both models together). This is a higher-level topic from Section 3.4 of the syllabus. A revision worksheet on the multiplier can be found here: http://www.tutor2u.net/blog/index.php/ib-diploma/C339/ The Accelerator The accelerator model is closely linked to the multiplier. The model looks at the relationship between a rise in national income in an economy and the effect upon capital investment by firms. Planned capital investment by firms is linked to the growth in demand for goods and services. Thus when there is an injection into the circular flow the multiplier effect will cause consumers to demand a higher number of goods and services. To meet this increase in demand firms need to increase their capacity and thus capital investment takes place. This is known as induced investment. This is the accelerator effect. The larger the value of the multiplier (the bigger the marginal propensity to consume) the greater the accelerator effect upon the economy. The increase in consumer demand means that firms are more willing to borrow to purchase capital goods and thus AD will shift to the right. IB Economics www.tutor2u.com IB Economics www.tutor2u.com The model also works in reverse, falling demand, leads to falling demand by firms for capital goods. Question Bank [10 marks] 1) What is the role of induced investment in explaining the accelerator effect? 2) Using examples, explain the difference between the multiplier and accelerator The slump in demand for new cars will have a reverse accelerator effect with car firms slashing their capital investment plans. An article on the BBC website today, February 20th, highlights that car production in January was 58.7% lower than in January 2008. Link to article: http://news.bbc.co.uk/1/hi/business/7901092.stm IB Economics www.tutor2u.com ...
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This note was uploaded on 02/08/2012 for the course FIN FIN4345 taught by Professor Koij during the Spring '10 term at FIU.

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105-Accelerator_Revision_Worksheet - IB Economics...

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