ACCELERATOR THEORY
It is a theory in economics that says that as the income or demand in an economy increases, so does the firms’ investments. In addition, this theory also states that if the level of the demand exceeded the actual supply, the firms will be left with only two choice to meet the demand:
- Increase the investment to accommodate the demand or
- raise prices in order for the demand to drop.
The accelerator theory suggests that most firms choose to have their productions increased so it will translate to increased profits. It also explains how the growth caused by the improvement in investments actually attracts additional investors therefore accelerating economic growth.
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