CA Foundation · Business Economics · Business Cycles
In Hicks' multiplier-accelerator model of business cycles, the upward turning point of the cycle is eventually reversed mainly because:
In Hicks' model, the upswing ends because income growth slows as the economy meets its full-employment ceiling. Induced investment depends on the rate of change of income, so it falls. The multiplier then transmits this fall in investment into lower income, turning the cycle downward.
- AThe multiplier becomes negative once income rises
- BGrowth of income slows, so induced investment falls and drags down incomeCorrect
- CThe government always raises taxes at full employment
- DConsumers permanently stop spending out of income
Explanation
Under the accelerator, induced investment depends on the rate of change of income. When income reaches the full-employment ceiling, its growth slows, so induced investment falls. Through the multiplier this reduces income further, starting the downturn. The multiplier does not turn negative; it works in both directions.
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