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hello kindly tackle these questions well and well explained CASE STUDY; In this theory it is assumed that firms estimate future profits by extrapolation of

hello kindly tackle these questions well and well explained

CASE STUDY;In this theory it is assumed that firms estimate future profits by extrapolation of past growth of output. While constant output growth leads to a constant rate of growth of capital stock, it takes accelerating output growth to increase the desired level of investment. Though the accelerator model is acknowledged to be a simplification of a complex process its usefulness has been confirmed by empirical research. Just how firms respond to changes in output will depend on a number of things including the extent to which firms believe that current growth in output will be maintained in the future and the cost of quickly adjusting investment plans. The more costly it is to adjust quickly, the more likely are firms to spread investment over a long time period. The underlying idea of the multiplier-accelerator model is that it takes an accelerating output growth to keep increasing investment, but it must be noted that once output growth settles to a constant level investment also becomes constant. Finally if output falls then the level of investment must fall also. The limits of the fluctuations around the trend path of output are referred to as ceilings and floors. If we assume that the circular flow of income is in equilibrium at less than full employment and there is an increase in investment, the effect of this will be to raise national income by more than an equivalent amount because of the effect of the multiplier

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