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Accelerator Revision Worksheet
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.
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IB Economics
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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
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