Accelerator Theory

AAA

DEFINITION of 'Accelerator Theory'

An economic theory that suggests that as demand or income increases in an economy, so does the investment made by firms. Furthermore, accelerator theory suggests that when demand levels result in an excess in demand, firms have two choices of how to meet demand.

  • Raise prices to cause demand to drop.
  • Increase investment to match demand.

The accelerator theory proposes that most companies choose to increase production thus increase their profits. The theory further explains how this growth attracts more investors, which accelerates growth.

INVESTOPEDIA EXPLAINS 'Accelerator Theory'

The accelerator theory was developed early in the twentieth century 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.

The accelerator theory is interpreted to create economic policies. For example, would it be better to use tax cuts to create more disposable income for consumers who would then demand more products, or would it be faster to give those cuts to business, which will then be able to use more capital for growth? Every government and their economists create their own interpretation of accelerator theory and the questions it can be used to answer.

RELATED TERMS
  1. Business Cycle

    The fluctuations in economic activity that an economy experiences ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects ...
  3. Financial Accelerator

    A financial theory that states that a small change in financial ...
  4. Aggregate Demand

    The total amount of goods and services demanded in the economy ...
  5. Demand Shock

    A sudden surprise event that temporarily increases or decreases ...
  6. Neoclassical Economics

    An approach to economics that relates supply and demand to an ...
Related Articles
  1. Economics Basics
    Economics

    Economics Basics

  2. Explaining The World Through Macroeconomic ...
    Options & Futures

    Explaining The World Through Macroeconomic ...

  3. Economic Indicators To Know
    Retirement

    Economic Indicators To Know

  4. How Influential Economists Changed Our ...
    Fundamental Analysis

    How Influential Economists Changed Our ...

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center