and Rudebusch, G.D. (1999), Business Cycles: Durations, Dynamics and Forecasting, Princeton: Princeton University Press. In case of the values of multiplier and accelerator falling within the region C, though they generate continued oscillations, the cycles produced by them tend to become ‘explosive’ (i.e. One of the famous theories of business cycles based on the interaction of multiplier and accelerator which also incorporate buffers in his analysis of fluctuations is that put forward by the noted English economist J R. Hicks. Similarly, the changes in induced consumption and induced investment and hence in income brought about by the initial increase in autonomous investment of Rs. We have shown below in Fig. 13.6. Thus, the values of c and v of region B can generate cyclical fluctuations over time without dying out if the above-mentioned disturbances are occurring frequently at random. This means that there is two periods gap for changes in income to determine induced investment. The change in business activities due to fluctuations in economic activities over a period of time is known as a business cycle. The magnitude of the variations in aggregate economic activities depends on the level of investment, for investment determines the level of aggregate output (multiplier effect), and is determined by aggregate demand (accelerator effect). Secondly, this paper will offer a critical analysis of his theory and highlight the importance of history throughout his work. David Martimore, Recent Developments in the Economic Theory of Incentives. According to the multiplier analysis, long-run equilibrium output is proportional to autonomous expenditure. 1. Jevan. Before publishing your Articles on this site, please read the following pages: 1. On the basis of the interaction of the multiplier and accelerator the two categories of business cycle theories have been put forward. In this way we see that the interaction between the multiplier and accelerator can give rise to the cyclical movements of the economic activity and its various phases. sis of the real theory of the business cycle provided by the multiplier-accelerator model of Samuelson [1939] with the Hicks' [1937] static IS-LM apparatus for the analysis of the role of money in the determination of aggregate income. What has been said about case C above also applies to region D where the values of multiplier and accelerator are such that give rise to directly explosive upward or downward move­ment which can be restrained by the factors determining the ceiling and floor. Samuelson’s Model of Business Cycles: Interaction between Multiplier and Accelerator! In static equilibrium, the level of income determined will be: This is due to the fact that in static equilibrium, given the data of the determining factors-, the equilibrium level of income remains unchanged, that is, in this case, Yt = Y t – 1 = Y t – 2 = Y t – n so that period lags have no influence at all and accelerator is re­duced to zero. (2017). However, the adequate explanation of the business cycles in this case would require the reasons why the system starts moving in the reverse direction, say, after striking the ceiling. The changes in any component of aggregate demand produce a multiplier effect whose magnitude depends upon the marginal propensity to consume. The region D in Fig. Samuelson [76]. The following are some of the measures to control business cycles. 27.5.The four paths or patterns of movements which the economic activity (as measured by gross national product or income) can have depending upon various combinations of the values of marginal propensity to consume (c) and capital-output ratio (v) are depicted in Fig. The situation is depicted in panel (c) of Fig. RBC theory suggests that business fluctuations are caused by shocks to productivity, which then propagate through the economy. The mul­tiplier alone cannot adequately explain the cyclical and cumulative nature of the economic fluc­tuations. This model was developed by Paul Samuelson, who credited Alvin Hansen for the inspiration. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. In the equation (iii) above, induced investment equals v(Y t – 1 – Y t – 2) or v (∆Yt – 1). It will be seen from column 5 of Table 13.1 that there are large fluctuations in income. Explanation to the Samuelson’s Model of Business Cycle: Samuelson in his seminal paper convincingly showed that it is the interaction between the multiplier and accelerator that gives rise to cyclical fluctuations in economic activity. From the above equations it is evident that consumption in a period t is a function of income of the previous period Yt-1. Outline of this chapter Exogenous Cause: e.g., meteorological changes Harrod’s Theory based upon his Instability Principle Mechanical Theory: by Hicks and Samuelson Biological Theory: by Goodwin Exogenous Causes: meteorological changes caused ,e.g., by sunspots (or black spots). Outline of this chapter Exogenous Cause: e.g., meteorological changes Harrod’s Theory based upon his Instability Principle Mechanical Theory: by Hicks and Samuelson Biological Theory: by Goodwin Exogenous Causes: meteorological changes caused ,e.g., by sunspots (or black spots). However, it is worth noting that the case B explains the impact of a single disturbance on income and employment. In case of the values of multiplier and accelerator falling within the region C, though they generate continued oscillations, the cycles produced by them tend to become ‘explosive’ (i.e., their amplitude tends to increase greatly). This means that there is two periods gap for changes in income to determine induced investment. Measures To Control Business Cycles. Report a Violation, The Hicks’ Theory of Business Cycles (Explained With Diagrams), Investment Multiplier: Basic Concept of Investment Multiplier, The Keynes’ Theory of Business Cycles (Explained With Diagram). The second part broadly covers microeconomics, and includes chapters which deal with demand, supply, elasticity and its applications, product markets, demand and behavior of consumer, business organisation and production, etc. However, in reality, further disturbances such as technological advances, innovations, natural disasters and man-made disasters such as security scam in India in 1991-92 do take place quite frequently and at random intervals and in a way they provide shocks to the system. The Samuelson-Hicks theory of Chapter 7 is an example of the treatment of oscillations in macro-economic quantities in period terms. It is assumed that initially in period t + 1, autonomous investment is of Rs. Thus, the values of c and v of region B can generate cyclical fluctuations over time without dying out if the above-mentioned disturbances are occurring frequently at random. That initially in period t + 1, autonomous investment being maintained constant at Rs 13.1 there. 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