Here’s how it works:

1. Increased Demand: When consumers demand more goods and services, businesses respond by increasing their production.
2. Investment Need: To meet this higher level of production, firms often need to invest in more capital, such as new machinery, equipment, or factory expansion.
3. Accelerated Investment: The increase in investment is often greater than the initial increase in demand. For example, if firms expect higher demand to persist, they may invest heavily in expanding their production capacity to meet future demand, thus amplifying the effect.

The accelerator effect highlights how investment is sensitive to changes in output. A small rise in demand can lead to a much larger increase in investment, which can then boost economic growth. However, this effect can also work in reverse: a fall in demand can lead to a disproportionate reduction in investment, potentially deepening an economic downturn.