Multiplier and Accelerator
1 How do the multiplier and the accelerator interact?
Multiplier
Change in
planned AD Change in Y
(for example I)
Accelerator
AD Aggregate demand Y National income / Output
I Investment
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2 How does the multiplier work?
21 A numerical example 22 The multiplier, graphically
Round Change in Y Change in C Change in S Change in Y
Multiplier =
(MPC = 0.7) (MPS = 0.3) Change in AD
1 ("I=1000) 1000 700 300
2 700 490 210
3 490 343 147 planned AD
4 343 240 103 (without foreign trade)
5 240 168 72
all future rounds 560 392 168 AD=Y
sum 3'333 2'333 1'000
AD2
Change
I = Investment Y =Output/National C = Consumption S = Saving in AD
income MPC = Marginal MPS = Marginal AD1
propensity to propensity to save
consume
Multiplier (K): 1
K= or
1-MPC
1
K= Change
MPS 45 o in Y
Y1 Y2 Y
Multiplier with taxes 1
and foreign sector = MPS+MPT+MPM
MPT = Marginal
propensity to tax
MPM = Marginal
propensity to import
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3 How does the accelerator work? A numerical example
Year Y (= Output) Stock of capital À Net investment Á Depreciation  Gross investment
Ã
(0) (100) (200)
1 100 200 0 10 10
2 120 240 40 10 50
3 140 280 40 12 52
4 160 320 40 14 54
5 160 320 0 16 16
À Capital - output ratio = 2 : 1
Á Net investment = 2 * change in output (in comparison to the previous year)
 Depreciation = 0.05 * Stock of capital (of the previous year)
à Gross investment = Net investment + depreciation
Remarks
• It can be seen that a (relatively) small increase in Y (from 100 to 120) causes a big increase in gross investment (from 10 to 50). If, however, Y
stagnates (160/160), gross investment is falling a lot (from 54 to 16). Thus, the accelerator is reinforcing the effects of the multiplier, upwards as
well as downwards.
• This reinforcing effect is due to the fact that there is a stock of capital which can be used to produce Y in the future. If you take only into account
net investment, this type of investment may be proportionate to the change in Y. In our case: Net investment = 2 * change in Y. The same can be
observed if you look at the effect of changes in Y on stocks of goods.
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