Cambridge International as and a level Economics Ebook

Year
Consumer 
demand
Machines at 
start of period
Number of 
machines 
required
Replacement 
investment 
(depreciation)
Induced 
investment
Total 
investment
1
800
8
8
1
0
1
2
1,000
8
10
1
2
3
3
1,600
10
16
1
6
7
4
1,800
16
18
1
2
3
5
1,800
18
18
1
0
1
6
1,700
18
17
0
0
0
Table 9.9 
Changes in investment
Accelerator theory: 
a model that suggests investment 
depends on the rate of change in income.
KEY TERMS
252
Cambridge International A Level Economics

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capital-output ratio
may change with fewer machines 
being needed to produce a given output.
Capital-output ratio: 
a measure of the amount of capital 
used to produce a given amount, or value, of output.
KEY TERM
TOP TIP
It is oft en useful to bring out the link between the 
multiplier and the accelerator and how they tend to 
reinforce each other. If investment increases, real GDP is 
likely to increase by a multiple amount which in turn will 
increase investment.
The Quantity Theory of Money
Aggregate expenditure is infl uenced by the money supply 
and, in turn, can infl uence the money supply. One theory 
which seeks to explain how changes in the money supply 
can have an impact on the economy is the
 Quantity Th
 eory 
of Money
. Th
is theory is based on what is called the