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Macroeconomics 1 – The domestic economy

3.5 Linkages

Accelerator

 Growth in incomes (Y) results in growth in investment (I)

 ∆I = ∆Y × Accelerator

 Works for positive or negative changes

Multiplier

 Net injections (e.g. extra I) results in growth in incomes (Y)

 ∆Y = ∆I × Multiplier

 Multiplier = 1/[1 – MPC] = 1/MPS

 Works for positive or negative changes

Trade cycles can be explained by looking at combined effect

1 Suppose we have a new injection – e.g. extra investment

2 Multiplier  increase in incomes Y

3 Accelerator  increase in investment I, so process repeats

4 Economy keeps growing until something stops it (e.g. full capacity). Investment
then falls

5 Multiplier  decrease in incomes Y

6 Accelerator  decrease in investment I, so decline continues

7 Economy keeps falling until something stops it

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