Accelerator Theory
An economic theory that suggests that as demand or income increases in an economy, so does the investment made by firms. Furthermore, when demand levels result in an excess in demand, firms have two choices as to how to meet demand: they can either raise prices to cause demand to drop, or increase investment to match demand. The accelerator theory proposes that the latter occurs. Investopedia Says:
The accelerator theory was developed early in the twentieth century in works by Thomas Nixon Carver and Albert Aftalion, among others. Although this theory was conceived before Keynesian economics, it emerged just as the Keynesian theory came to dominate the economic mindset of the twentieth century. Critics argue that accelerator theory should not be used because it eliminates the possibility of controlling demand through price controls. However, empirical research on the accelerator theory has supported its use. Related Terms:
Aggregate Demand
Business Cycle
Demand Shock
Keynesian Economics
Neoclassical Economics |