Questions: In the accelerator theory of investment the level of investment will tend to increase when technical progress makes machinery more efficient the expected growth of aggregate demand is greater the expected growth of aggregate demand is smaller the desired capital-output ratio is smaller

In the accelerator theory of investment the level of investment will tend to increase when technical progress makes machinery more efficient the expected growth of aggregate demand is greater the expected growth of aggregate demand is smaller the desired capital-output ratio is smaller
Transcript text: In the accelerator theory of investment the level of investment will tend to increase when technical progress makes machinery more efficient the expected growth of aggregate demand is greater the expected growth of aggregate demand is smaller the desired capital-output ratio is smaller
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The answer is the second one: the expected growth of aggregate demand is greater.

Explanation for each option:

  1. Technical progress makes machinery more efficient: While technical progress can lead to more efficient machinery, which might encourage investment, the accelerator theory specifically focuses on changes in demand rather than technological improvements. Therefore, this option is not directly related to the accelerator theory.

  2. The expected growth of aggregate demand is greater: The accelerator theory of investment posits that investment levels are closely tied to changes in aggregate demand. When businesses expect higher growth in aggregate demand, they anticipate needing more capital to meet future production needs, leading to increased investment. Thus, this option is correct.

  3. The expected growth of aggregate demand is smaller: If the expected growth of aggregate demand is smaller, businesses would anticipate less need for additional capital, leading to a decrease in investment. This is contrary to the accelerator theory, which suggests investment increases with higher expected demand.

  4. The desired capital-output ratio is smaller: A smaller desired capital-output ratio implies that less capital is needed per unit of output. This would typically lead to a decrease in investment, as businesses would not need to invest as much to achieve the same level of output. Therefore, this option does not align with the accelerator theory's prediction of increased investment.

In summary, according to the accelerator theory, investment tends to increase when the expected growth of aggregate demand is greater.

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