The Acceleartor Effect
Definition The Accelerator Effect: The accelerator effect states that investment levels are related the rate of change of GDP. Thus an increase the rate of economic growth will have a corresponding larger increase in the level of investment.
Implications of the Accelerator Effect
- Investment tends to be more volatile than economic growth
- The the rate of economic growth stays the same. Investment levels will also stay the same
- Investment spending can fall even when GDP is rising. This is because if there is a fall in the rate of economic growth firms may invest less.
- If GDP falls, investment spending can fall very significantly.
- Accelerator Coefficient. This is the level of induced investment as a proportion of a rise in National income accelerator coefficient = Investment / change in Income
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