The accelerator model suggests that the most important determinant of investment is
A) the interest rate
B) the level of consumer demand.
C) changes in consumer demand.
D) the level of current GDP

Question

Quizplus · Accepted Answer

The accelerator model states that investment is determined by changes in consumer demand. When consumer demand increases, businesses invest in more capital goods to meet the demand, and when consumer demand decreases, businesses reduce their investment in capital goods. This makes the most sense for predicting investment behavior in the short to medium term. The interest rate (A) may impact investment decisions, but not to the extent that changes in consumer demand do. The level of current GDP (D) may also be a factor in investment, but the accelerator model specifically highlights the importance of changes in consumer demand.

The Accelerator Model Suggests That the Most Important Determinant of Investment