Consider the following simple accelerator principle for the determination of net investment: I_{t} = v (Y^{e}_{t+1} – Y_{t})

where v is the capital-output ratio, Y^{e}_{t+1} is expected demand in period t+1 and Y_{t} is actual output in period t

a Suppose v = 2, Y_{t} = 150 and Y^{e}_{t+1} = 170 What will be the level of net investment in period t?

b If firms generally become more optimistic about the future and expect higher demand, what will be the impact on investment?

c What will be the effect on investment of technological progress?

Answer;

a) v=2, yt=150, yet+1=170,

Formula for net investment period t is....

(V=t*2)

Yt+1E−Yt = Yt-1

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## 1 Approved Answer

January 26, 2021Answer;

a) v=2, yt=150, yet+1=170,

Formula for net investment period t is....

(V=t*2)

Yt+1E−Yt = Yt-1

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