Schedule C Weaker Topics

Question 1

Define accelerator theory

Answer 1

Where increases in national income lead to firms spending more on investment, in order to expand their capacity to exploit the rising income. Therefore, increases in the rate of growth of national income will lead to even larger increase in the level of investment.

Question 2

Consider an industry where demand is rising quickly. How will firms initially respond and how might their subsequent responses lead to an accelerator effect?

Answer 2

• In this industry, firms may initially respond by using their existing capacity more intensively, using spare capacity or running down stocks of finished products.
• if they EXPECT high demand will be sustained, they may increase spending on investment (plant & machinery, factories, new tech) in order to increase their productive capacity
• This causes an accelerator effect - where a given change in demand for consumer goods and services will cause a bigger percentage change in demand for capital goods.

Question 3

How can we get a negative accelerator effect?

Answer 3

If the growth rate of national income falls, then firms will not need as large a productive capacity and therefore investment in maintaining capacity can fall.

Question 4

Define saving

Answer 4

Saving occurs when people decide to postpone consumption until a later date

Question 5

Another term for savings is _____

Answer 5

Savings is deferred spending

Question 6

How might wealth affect the level of savings?

Answer 6

In a period of rising asset prices, households may feel less necessity to save. For example, a rise in house prices leads to an increase in wealth that homeowners can access through mortgage equity withdrawal. In the 1980s and early 2000s, there was a significant rise in house prices which increased the wealth of homeowners - this gives households more confidence to reduce savings levels (positive wealth effect).