The multiplier and its operation are both based on certain assumptions, non-fulfilment or partial fulfillment of which adversely affects the working of the multiplier retarding the process of income generation.
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Some of these assumptions are outlined below:
1. Availability of Consumer Goods:
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Availability of adequate supply of consumption goods is the basic requisite of income propagation and hence of multiplier process to operate. According to Dr V.K.R.V. Rao, “the principle of multiplier does not work vigorously in an underdeveloped country like India on account of inelastic nature of the consumption output curve”. If consumer goods were not available, consumers would not be able to spend their incomes on these goods. Value of MPC and hence that of the multiplier would be low.
2. Maintenance of the Level of Investment:
Various increments in investment spending have to be repeated at regular intervals so that the multiplier process receives its regular feed. If there is a break in the continuity of investments, national income will fall back to the original low levels.
3. Overall Increase in Investment:
An increase in investment in one sector should not be offset by a disinvestment in another sector. If this happens, the overall increase in investment in the economy is low or zero and so is income generation. The multiplier has only little to multiply.
4. Induced Consumption should have No Adverse Effect on Investment:
Induced consumption should have no dampening effect on investment. In other words, it is assumed that accelerator should not interfere with the working of the multiplier.
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For this, accelerator should never be less than one. If it were, ∆I < ∆C and induced consumption would dampen investment and hence income generation.
The process of retardation of the multiplier process by the accelerator has already been explained in the earlier section.
5. MPC should Remain Unchanged:
The marginal propensity to consume is assumed to remain unchanged failing which the value of the multiplier would be highly unstable.
6. Existence of Closed Economy:
In order to realize the full impact of the multiplier process, it is assumed that the economy should not have any trade relations with the outside world. If the economy is open to the rest of the world, export surpluses and deficits would make the value of the multiplier either greater or smaller than its true value respectively.
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Export surpluses lead to income streams from the rest of the world and hence the value of the multiplier works out higher than its true value. In like manner, if there exist export deficits, leakages from the multiplier result, affecting its value adversely.
7. Absence of the Time Lags between Successive Expenditures on Consumption:
Expenditure on consumption should not lag much behind the receipt of income. Long time lags retard the process of income generation through the multiplier.
8. Economy Should Be at Less than Full Employment:
At full employment, growth of output, income and employment stagnate and multiplier becomes very low. Some unemployment of involuntary type must exist.