What does the accelerator principles state?

1. Analyze the question The question asks for the statement of the accelerator principle, a concept from macroeconomics on how investment behaves.

2. Explain the concept The accelerator principle says that induced investment depends on the rate of change (growth) of national income or output. When income and demand rise, firms must expand their capital stock (machines, factories) to meet the extra demand, so investment increases, often by more than the rise in income. When income growth slows, investment can fall sharply.

Written simply: I = v × ΔY where I is investment, v is the accelerator coefficient (capital-output ratio), and ΔY is the change in income.

3. Go through the options

• A. Consumption depending on the change in income is not the accelerator. Consumption is linked to the level of income, which is the multiplier/consumption function idea. ✗
• B. This reverses the relationship. The multiplier says income changes in response to investment changes. ✗
• C. Investment is a function of the rate of change of income. This matches the accelerator principle exactly. ✓
• D. Investment depending on the interest rate is the Keynesian/marginal efficiency of capital view, not the accelerator. ✗

4. Answer

5. Exam tip Remember the pair:

• Multiplier: investment change → income change (B is this idea reversed)
• Accelerator: income change → investment change (C)

The accelerator "accelerates" investment when income is growing.