CA Foundation · Business Economics · Business Cycles
In a simple multiplier-accelerator model, the accelerator coefficient is 2. Consumption demand in an Indian economy rises from ₹500 crore to ₹550 crore. Assuming induced investment depends only on the change in consumption, what is the induced investment in that period?
Induced investment is ₹100 crore. The accelerator links investment to the change in consumption, not its level: 2 multiplied by the rise of ₹50 crore (550 minus 500) gives ₹100 crore. Using the level of consumption or ignoring the coefficient gives wrong figures.
- A₹50 crore
- B₹100 croreCorrect
- C₹150 crore
- D₹1,100 crore
Explanation
Induced investment = accelerator × change in consumption = 2 × (550 − 500) = 2 × 50 = ₹100 crore. Check: 100/50 = 2. ₹50 crore ignores the accelerator. ₹1,100 crore wrongly multiplies the level of consumption, not the change, by 2.
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