Question
In the context of the Investment Function, which of the
following best describes the 'Accelerator Principle'?Solution
The Accelerator Principle is a theory of induced investment. It posits that the level of net investment (I) is a function of the rate of change in output (ΔY) or national income, not its absolute level. The logic is that an increase in demand (output) requires an increase in the capital stock to produce it. The accelerator coefficient (v = I/ΔY) represents the desired capital-output ratio. So, if output is growing, investment is high to add new capacity. If output growth slows, investment falls. This contrasts with theories where investment depends on the cost of capital (interest rates, option a & d) or is autonomous (option c).
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Find the correct word.
Find the error.
Find out the appropriate word.
