Currently covering Keynes vs Monetarist in the A2 course. Here is a powerpoint on the theory that I use for revision purposes. I have found that the graphs are particularly useful in explaining the theory. The powerpoint includes explanations of:
– C+I+G+(X-M) – 45˚line – Circular Flow and the Multiplier – Diagrammatic Representation of Multiplier and Accelerator – Quantity Theory of Money – Demand for Money – Liquidity Preference – Defaltionary and Inflationary Gap – Extreme Monetarist and Extreme Keynesian – Summary Table of “Keynesian and Monetarist” – Essay Questions with suggested answers.
This part of the syllabus will come up either as a multiple-choice question or part of an essay. The accelerator theory states that investment is determined by the RATE AT WHICH INCOME, AND HENCE OUTPUT, CHANGES OVER TIME. The principle states simply that unless the rate of increase in consumption is maintained, the previous level of investment will not be maintained.
This theory assumes that firms try to maintain some constant relationship between the level of output and the stock of capital required to produce that output. In other words, we assume a constant capital-output ratio which can be expressed in either physical terms or money terms. The accelerator helps us to understand how small changes in demand in one sector can be magnified and spread throughout the economy. The example below assumes that the firm starts with 8 machines each year and 1 machine wears out each year and that each machine can produce 100 units of output per year. In the second year, demand rises for capital goods rises by 200% (from 1 to 3). When the rate of growth of demand for consumer goods slows in year 4, demand for capital goods falls. In year 6 demand drops and they is no requirement for any investment.
Limitations of Accelerator: * Firms can meet output with stocks – may not need investment * Changes in technology may mean firms don’t need to invest in as much capital as before * Firms need to be convinced that demand is long-term to warrant investment * Limited supply of technology available
Here is an excellent webinar by Geoff Riley of Tutor2u on the multiplier and accelerator. This is part of Unit 5 in the CIE A2 course. Although the examples that he talks about are UK based he explains the theory very well. Worth a look especially with mid year exams approaching.