Page 232 - DECO402_Macro Economics

Unit-25: The Super-Multiplier of the Multiplier Accelerator Interaction

6. Increase in income of period t + 1 is equal to the quantity of initial ................. Notes
(a) investment (b) disinvestment
(c) money (d) none of these

25.2 Use of Multiplier Accelerator Interaction in Business Cycles

With different values of MPC and accelerator, Multiplier- accelerator may give different results in
form of cyclical ups and downs. Assume that MPC= 0.5 and accelerator co-efficient is 2. On previous
concepts and initial investment given as ` 100 crores, we will study this fact that how changes takes
place in income. Table II clarifies this process of multiplication of income.

Task Express your thoughts on super-multiplier or multiplier- accelerator interaction

Table II: Multiplier Accelerator Interaction
` Crore
Duration Initial Induced Induced Increase in
(1) Investment consumption Investment income
(2) (c = 0.5) (v = 2) (2 + 3 +4)
(3) (4) (5)
t + 0 0 0 0 0
t + 1 100 – – 100
t + 2 100 50 100 250
t + 3 100 125 150 375.00
t + 4 100 187.50 125 412.50
t + 5 100 206.25 37.50 343.75
t + 6 100 171.88 –68.74 203.14
t + 7 100 101.57 –140.62 60.95
t + 8 100 30.48 –142.18 –11.7
t + 9 100 -5.48 –72.66 21.49
t + 10 100 10.75 33.20 143.95

Above table reveals this that in period t + 1 increase in income is equal to amount of initial investment.
This increase in income brings an increase of ` 50 crores in period t + 2 (column 3) because MPC is 0.5.
This increase in consumption induces investment of ` 100 crores, on acceleration co-efficient being 2
` 100 crores = 50 × 2 (column 2), and income increases up to ` 250 crores. ( sum of column 2 + 3 4 i.e.
100 + 50 + 100 = 250) This increase in income again brings an increase of ` 125 crores in consumption
(column 3) which is half of ` 250 crores because MPC = 0.5. But in period t, consumption is a function
of income of previous period. Hence actual increase in consumption in period t + 3 is difference
between consumption in period t + 2 and t + 3, i.e., 125 – 50 = 75. If this increase in consumption( `
75 crores)is multiplied with 2, the value of accelerator then, induced investment 150 = 75 × 2 (column
4) is obtained in period t + 3. Hence in period t + 3, ` 375 crores, sum of columns 2 + 3 + 4 expresses
increase in income. Similarly, in t + 4 ` 412.50 crores of income is produced. In this period, increase
of income is the most which shows the peak of business cycle; after this income starts falling until it
does not reach the bottom or the trough in t + 8 i.e. at ` (–)11.78 crores. From period t + 9, it will start

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