How does Samuelson's model of multiplieraccelerator...

Name: Problem 9, Chapter 22: Macroeconomics: Theory and Policy
Uploaded: 2023-10-17T15:49:10-08:00
Duration: 4 min 56 s
Channel: Crystal Wang
Description: How does Samuelson's model of multiplieraccelerator interaction explain the phenomena of boom and depression? Suppose the value of multiplier is very high and that of accelerator very low. What kind of business cycle will it produce?

How does Samuelson's model of multiplieraccelerator interaction explain the phenomena of boom and depression? Suppose the value of multiplier is very high and that of accelerator very low. What kind of business cycle will it produce?

Key Concepts

Cycle Dynamics

The combination of a high multiplier and a low accelerator in Samuelson’s model means that while changes in autonomous spending (via the multiplier) strongly affect output, the investment response (via the accelerator) is less pronounced. This configuration tends to produce business cycles characterized by more sustained booms and depressions rather than rapid, volatile swings—a pattern where the impact of spending shocks is amplified overall, but the delayed investment reaction moderates the timing and severity of cyclical reversals.

Accelerator Principle

The accelerator principle posits that firms’ investment decisions depend on the rate of change of economic output rather than its absolute level. When output is rising, even gradually, firms are incentivized to invest more to build up capacity, and when output falls, investment is reduced. This responsiveness can induce fluctuations that contribute to the cyclical nature of the economy, especially when combined with the effects of the multiplier.

Multiplier?Accelerator Model

This is a macroeconomic framework that combines the multiplier effect, which amplifies changes in autonomous spending, with the accelerator principle, which links investment to changes in output. The interaction of these two mechanisms helps explain cyclical fluctuations in economic activity, where initial shocks are magnified and then reinforced or dampened by subsequent investments reacting to changes in income levels.

Multiplier Effect

The multiplier effect refers to the idea that a change in autonomous spending (such as government expenditure or exports) leads to a larger overall change in income and output. This occurs because the initial spending creates income for someone else, who in turn spends a portion of that income, further increasing aggregate demand. In the context of business cycles, a high multiplier means that small shocks can cause significant shifts in overall economic activity.

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