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The Multiplier:
In his theory Keynes asserted that consumption is a function of income, and so it follows that a change
in investment, which we may call ?I, meaning an increment in I will change Y by more than?I,. For while
the initial increase in Y, ?Y, will equal to ?I, this change in Y will itself produce a change in C, which will
increase Y still further. The final increase in income thus exceeds the initial increase in investment
expenditure which is therefore magnified or “multiplied”. This process is called the multiplier process.
The Accelerator:
Suppose that there is a given ratio between the of output Yt at any time t, and the capital stock required to
produce it Kt and that this ratio is equal to a hence:
Kt = a Yt
The coefficient a is the capital – output ratio, a = K/Y and is called the accelerator co-efficient. If there is
an autonomous increase in investment, ?I this through the multiplier process will lead to increased
employment resulting in overall increase in income, ?Y. This may lad to further investment called
induced investment in the production of goods and services. This process is called acceleration.
Wilfykil answered the question on February 6, 2019 at 11:03
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