multiplier-accelerator model
multiplier-accelerator modelThe model deriving economic fluctuations from the interaction of the multiplier and the accelerator. The multipier makes output rise following a rise in investment, and the accelerator makes investment increase when output increases. Once expansion starts, if the accelerator is strong the economy tends to explode; but if the accelerator is weak, as empirical studies suggest, expansion slows down, which lowers investment and causes incomes to decline. A slump follows, during which investment is low and capital wears out. Once capital has fallen sufficiently relative to output, investment starts again and the economy expands. This can produce persistent trade cycles of alternating booms and slumps.
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