According to the accelerator theory of investment, what drives induced investment?
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Answer: C. the rate of change of national income
Explanation
The accelerator theory states that induced investment is driven by changes in national income. Firms adjust their capital stock in response to the velocity of sales growth rather than static income levels. The rate of change of output determines whether businesses expand or contract their capital investments. Induced investment depends directly on economic growth fluctuations rather than static aggregate demand levels. The acceleration coefficient links changes in output demand to required net capital additions. Business cycles are amplified by accelerator effects where output slowdowns trigger sharp investment drops.
Macroeconomic forecasters use accelerator theory to predict capital expenditure cycles in manufacturing industries. Understanding investment drivers helps central banks manage monetary policy transmission during economic expansions. Corporate financial planning relies on anticipated sales growth rates to justify new plant and equipment spending. The level of national income determines consumption and general demand rather than induced investment directly. Aggregate demand levels influence overall economic activity, but investment specifically responds to output changes. Expectations influence investment, but the specific mechanism of the accelerator model relies on output changes.
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