Affect Of Multiplier And Accelerator Theory On The Economic Cycle

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To what extent can the Multiplier and Accelerator theory be used to justify the Economic Cycle? The multiplier and accelerator are economic theories which are believed to determine the economic cycle. In many cases the real world doesn't work precisely how theory may suggest. Therefore, addressing the question whether the theories justify the economic cycle causes an in depth discussion. This essay will be justifying the extent to which the multiplier and accelerator theories can be used to justify the economic cycle. The multiplier theory is quite self explanatory as the name is a part of its definition. The effect is where any component of aggregate demand inevitably leads to a greater change in Real GDP (output). The size of the multiplier is measured by an economies leakages, a leakage is the income that is not used for consumption instead it is split into savings, taxes and imports. The amount of additional national income that goes to leakages is known as the marginal propensity to withdraw (MPW). This is constructed of the marginal propensity to save (MPS), marginal propensity to tax (MPT) and the marginal propensity to import (MPM). The MPS is the amount of additional national income that is saved, the MPT is the amount of additional national income that is taxed and the MPM is the amount of additional national income that is spent on imports. The value of the multiplier can be worked out by the following formula ; 1/MPW Furthermore, the accelerator theory is closely linked to the multiplier, this states that the rate of change of national income determines the level of investment. So, if the rate of national income increases it will increase the level of investment. Therefore, leading to the multiplier effect as a component of aggregate demand has changed so does real GDP. With more output there will be more national income which in turn goes around

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