Question

analysis the effect of an increase in initial investment on the real output of an economy? is there any role of interaction between multiplier effect and accelerator effect in this analysis? explain your answer pleas.

Answer 1

Initial investment means capital expenditures I.e purchasing machines or building or building factories .Investment is a component of Aggregate demand ,if investment increases aggregate demand increases .If the economy has a spare capital ,an increase in investment could cause a knock on effect on the output.We can take an example if government spent 300 million dollers on road construction .This involves employing workers and paying suppliers for raw materials hence GDP/ output rises by $300 mn now workers will spent a part of their income on consuming goods this creates an economic output of $100 mn more hence increase in real output is $400 mn with investment of $300mn hence the multiplier = real output/ initial investment =$400 mn/$300 mn =1.33

Hence an increase in investment causes a rise in output to a greater extent.Also the acceleration principle draws a connection between rate of change of consumption and capital investment or increase in consumption of workerks with increase in income have a magnified effect on investment that is more production facilities are to be set up.