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Multiplier-accelerator models - Essay Example

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It is however, also argued that the work of both the economists was actually an extension of the work done by John M Keynes and Richard Kahn.( Sørensen & Whitta-Jacobsen,…
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Multiplier-accelerator models
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Multiplier-accelerator models

Download file to see previous pages... Keynes argued that level of output will increase due to multiplier relationship between output and autonomous consumption. (Hartley, J. et al. 1998). Change in output due to change in investment can be described in following manner:
The Accelerator model is based upon the assumption if current economic activity increases, it will allow entrepreneurs to expand productive capacity by investing into additional capital stock . The Acceleration principle also outlines that there will be an increase in the output level with the increase in investment and there will be an additional investment when output increases.
The above relationship suggests that consumption comprises of overall autonomous consumption and the propensity to consume with respect to the past income of an individual. Samuelson’s model therefore outlines different parametric conditions under which economy can move and as such economic cycles can occur. Samuelsson’s model is considered as incomplete as a theory of regular cycles because of its inability to predict regular business cycles however, it is still considered as one of the key advances in macroeconomic theory.
Lloyd Metzler’s model was based upon his famous Inventory Cycle principle and suggested that the precise inventory policy as chosen by the producers might have an impact on the economic cycles. This model outlines that the change in output is a relationship between the consumption and investment and investment comprises of the investments made in inventory considering capital stock as constant. (Sørensen, and Whitta-Jacobsen, 2010).
Hicksian Model was also another attempt to understand the business cycles and how consumption and investment actually have an impact on the income level. Hicks assumed that the consumption is the function of past income while investor attempts to maintain a stock of capital in relation with the income.
The combination of income and consumption therefore can generate oscillation in income or ...Download file to see next pagesRead More
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