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Accelerator effect

Accelerator effect

Definition of 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. However, a fall in the rate of GDP growth could lead to lower investment levels. The accelerator model attempts to explain the volatility of investment that we see. Simple Accelerator Model This model assumes that the stock of capital goods (k) is relative to Y K = k×Y If we assume that the capital output…

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Accession countries

Since its formation in 1954 the European Union has undergone various stages of expansion. In particular, 2004 saw a big increase in the number of EU countries – many of these former Eastern European countries. These are known as ‘accession countries’ To join the European Union it was necessary for these accession countries to undertake certain reforms and agree to follow European law. Turkey is hoping to join but there are more difficulties over its accession because of its different background and dispute with Greece over Cyprus. Accession countries of 2004 Cyprus Czech…

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Accommodative monetary policy

Accommodative monetary policy means a policy of allowing the money supply to rise in line with national income and the demand for money. Accommodative monetary policy will also usually involve lower interest rates. Accommodative monetary policy may also be known as ‘easy monetary policy’ / loose monetary policy. Accommodative monetary policy involves: Lower interest rates. Lower interest rates tend to encourage spending and economic growth through making borrowing cheaper. Allowing money supply to rise Impact of accommodative monetary policy In theory lower interest rates and increased money supply will: It is likely to lead to higher economic…

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Accounting period

The accounting period refers to the timespan – usually a one year period, in which a company produces a set of accounts. This will involve income, expenses and profits. The two main statements are: A profit and loss account – Income vs expenditure showing net profit (loss) Balance sheet – A list of the liabilities and assets of a firm Tax year In the UK, the official tax year is April 6th to April 5th. This is often used as an account period as taxes have to be produced for profit in this…

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Acquisitions

Definition of acquisition: To gain control over another firm, usually through the purchase of shares of the company or to buy assets of the business directly. Acquisition may involve a takeover where one firm buys out another, often against the wishes of certain taxpayers. People may talk of an acquisition when there is a mutually agreed merger – in which two firms of equal standing decide to come together to form one firm. In practise there is often a blurring of the distinction between merger and acquisition. Generally, an acquisition is…

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Actuary definition

An actuary is a person who works with complex mathematical models to try and predict the likelihood of future events. An actuary is particularly important for the insurance industry. An actuary looks at the average propensity for disastrous events to occur and uses these percentages to try and predict a fair price to set insurance premiums These predictions take into account observed trends like death rates, crime rates. They will try to break down statistics into different groups, enabling different premiums to be set for different groups of consumers. For…

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Adaptive expectations

Adaptive expectations is an economic theory which gives importance to past events in predicting future outcomes. A common example is for predicting inflation. Adaptive expectations state that if inflation increased in the past year, people will expect a higher rate of inflation in the next year. A simple formula for adaptive expectations is Pe = Pt. -1   This states people expect inflation will be the same as last year. The adaptive expectations hypothesis. The theory that people base their expectations of inflation on past inflation rates. In more complicated adaptive expectation…

Adjustable peg exchange rate

Adjustable peg exchange rate

Definition adjustable peg An adjustable peg exchange rate is a system where a currency is fixed to a certain level against another strong currency such as the Dollar or Euro. Usually, the peg involves a degree of flexibility of 2% against a certain level. However, if the exchange rate fluctuates by more than the agreed level, the Central bank needs to intervene to maintain the target exchange rate peg. An adjustable peg system usually allows countries to revalue their peg – if it is necessary to regain competitiveness. The adjustable…