Multiplier theory is operating some assumptions. For smooth operation of the multiplier the following assumptions and conditions are required has to be fulfilled.
1. Continuous investment: for the creation of the state of multiplier, the investment has to be continuous.
2. There is no change in marginal propensity to consume: despite the change in income, there should be no change in marginal propensity to consume.
3. There is no change in price level: a change in the price level of any goods also changes the consumption. This will result in the changes in the value of the multiplier. So, there should be no change in the price level.
4. Closed economy: for obtaining multiplier the economy of one country has no relation with the economy of the other countries. So, whatever expenditure is in the domestic country the investment will also be the same amount successively. But if the economy is related to the economy of other countries, then the people will use their income on foreign goods.
5. Existence of less than full employment: in an economy there should be the state of under-employment rather than full employment. For this reason, the multiplier will be active and increase in income; output and employment will be continuous. In other words. For continuous multiplier there should not be the state of full employment.
1. Continuous investment: for the creation of the state of multiplier, the investment has to be continuous.
2. There is no change in marginal propensity to consume: despite the change in income, there should be no change in marginal propensity to consume.
3. There is no change in price level: a change in the price level of any goods also changes the consumption. This will result in the changes in the value of the multiplier. So, there should be no change in the price level.
4. Closed economy: for obtaining multiplier the economy of one country has no relation with the economy of the other countries. So, whatever expenditure is in the domestic country the investment will also be the same amount successively. But if the economy is related to the economy of other countries, then the people will use their income on foreign goods.
5. Existence of less than full employment: in an economy there should be the state of under-employment rather than full employment. For this reason, the multiplier will be active and increase in income; output and employment will be continuous. In other words. For continuous multiplier there should not be the state of full employment.
post dat there is no time lag
ReplyDeleteavailibility of consumer goods
Post that there fluctuations in autonomous investment where as induces investment is constant.
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