CA Foundation · Business Economics · Business Cycles
In Samuelson's multiplier-accelerator model of business cycles, cyclical fluctuations arise because:
Samuelson's model generates cycles from the interaction of the multiplier and the accelerator. Investment responds to changes in income through the accelerator, and that investment changes income by a multiple through the multiplier. This interplay creates repeated expansions and contractions in economic activity.
- AInduced investment depends on changes in income, and it interacts with the multiplier effect of investment on incomeCorrect
- BMoney supply is expanded and contracted at random by banks
- CExports always equal imports in every period
- DGovernment spending is held fixed while taxes vary
Explanation
The accelerator makes induced investment depend on the change in output or consumption. The multiplier turns that investment into larger income changes. Their interaction can generate self-reinforcing upswings and downswings. Random bank behaviour is not the mechanism, and the model does not rely on fixed government spending.
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