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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