When income increases, people spending power increases; their consumption increases and consequently demand for consumer goods increases.
In order to meet this enhances demand, investment must increase to raise the productive capacity of the community. So acceleration is a relationship between the induced investment and the rate of change of national income. Acceleration shows the effect of increase in income and thereafter increases in demand for good and services thus putting pressure on investment. Investment will be high when output (income) is growing while there may be low investment when output (income) is falling.
Effect Of Multiplier And Acceleration
- Suppose change in investment is Rs.500
- Numerical value of K (multiplier) is x 4
- Then change in national income (Y) will be Rs.2000
- Suppose value of acceleration is x 5
- Then change in investment (I) will be Rs.10,000
- Then change in national income
(Y) will be Rs.40,000