CA Foundation · Business Economics · Business Cycles
In the Samuelson-Hicks multiplier-accelerator model of business cycles, the cycle is generated mainly because:
In the multiplier-accelerator model, a rise in income induces higher investment through the accelerator, and that investment raises income again through the multiplier. When income growth slows, induced investment drops sharply and income falls. This mutual interaction produces cyclical fluctuations in economic activity.
- AGovernment always runs a balanced budget
- BThe money supply is fixed by the central bank at all times
- CChanges in income alter induced investment through the accelerator, and investment changes alter income through the multiplierCorrect
- DForeign trade remains unaffected by domestic income
Explanation
A rise in income raises consumption and, via the accelerator, induces larger investment. That investment then raises income further through the multiplier. When income growth slows, induced investment falls sharply and the process reverses. Fixed money supply or balanced budgets are not the mechanism.
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