Multiplier & Accelerator Effect

Key Terms
Multiplier Effect (Positive): An increase in spending which causes a proportionally greater increase in real national output.

Accelerator Effect: An increase in real national output which causes a proportionally greater increase in investment
Theory

Multiplier Effect

The fiscal multiplier effect arises when an injection into the economic cycle causes a proportionally greater increase in real national income.

Injections include:

  • Consumer spending (C)
  • Investment (I)
  • Government Spending (G)
  • Exports (X)


    • For example, if a foreign company invested £1 Million there would be an increase in aggregate demand by £1 million. An increase in aggregate demand will increase employment and therefore spending, which further increases AD.


    Accelerator Effect

    The accelerator effect assumes that investment is related to change in GDP (Real National Output). An increase in GDP will cause a proporionally greater increase in investment.

    This is because when GDP increases firms respond to increased demand by investing in new technologies or production methods in order to increase their production capacity.








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