Macroeconomics

Table of Contents

1. Topic pack - Macroeconomics - introduction
2. 2.1 The level of overall economic activity (notes)
3. 2.1 The level of overall economic activity (questions)
4. Section 2.2 Aggregate demand and supply (notes)
5. Section 2.2 Aggregate demand and supply (simulations and activities)
6. 2.2 Aggregate Demand and Aggregate Supply (questions)
7. 2.3 Macroeconomic objectives (notes)
8. Low Unemployment
9. 2.3 Macroeconomic objectives (questions)
10. 2.4 Fiscal policy (notes)
    1. Fiscal policy - introduction
    2. The government budget
    3. Types of government expenditure
    4. A Case study: Government spending in the UK
    5. The budget outcome
    6. Fiscal policy and short-term demand management
    7. Impact of automatic stabilisers
    8. Fiscal policy and its impact on potential output
    9. Evaluation of fiscal policy
    10. The multiplier effect & fiscal policy
    11. Accelerator
    12. Crowding out
11. 2.4 Fiscal policy (questions)
12. 2.5 Monetary policy (notes)
13. 2.5 Monetary Policy (questions)
14. Section 2.6 Supply-side policies (notes)
15. 2.6 Supply-side policies (questions)
16. Print View

Accelerator

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• The accelerator

Importance of the accelerator

The accelerator principle indicates how changes in the level of current income will have an accelerated impact on the level of investment and is, therefore, one explanation of economic instability and the upward and downward swings of the trade cycle.

Accelerator principle - some qualifications

• The upward leverage effect of the accelerator only takes effect if industry is operating at or near full employment. If industry has excess capacity it can meet any increase in demand by increasing output of underutilised equipment.
• Additional machines will only be ordered when the increased demand is believed to be permanent. Otherwise, firms will deal with additional orders by running down stocks or operating waiting lists.
• There may be an increase in demand for investment goods, but if the capital goods industries are fully employed, there may be an increase in the prices of capital goods and there could actually be a fall in demand for capital with more capital saving techniques being adopted. Here the accelerator will be reduced.

Weaknesses of accelerator theory

The accelerator assumes a fixed relationship between a change in consumption and a change in investment - the bullet points above show that this is not necessarily the case. The accelerator principle also ignores the time lags, which would probably occur in reality, between a change in consumption and the implementation of any investment decisions.