Assumptions of multiplier

Keynes’ theory of the multiplier works under certain assumptions which limit the operation of the multiplier. They are as follows:

(i)     The marginal propensity to consume is constant.

(ii)    There is a closed economy unaffected by foreign influences.

(iii)   Consumption is a function of current income.

(iv)    There are no time lags in the multiplier process.

(v)     There are no changes in prices.

(vi)    The economic situation should be less than full employment level. If there is already full employment, MPC will not be effective.

(vii)   The new level of investment is maintained steadily for the completion of the multiplier process.

(viii)  Consumer goods are available in response to effective demand for them.

(ix)    Other resources of production are also easily available within the economy.

(x)        There is net increase in investment

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