Question

Specify the limitations of the multiplier.

Give any four limitations of the multiplier.

Answer 1

1. There is a change in autonomous investment.
2. There is no induced investment.
3. The marginal propensity to consume is constant.
4. Consumption is a function of current income.
5. There are no time lags in the multiplier process.
6. Consumer goods are available in response to effective demand for them.
7. There is a closed economy unaffected by foreign influences.
8. There are no changes in prices.
9. There is less than full employment level in the economy.

Answer 2

1. MPC being constant: The multiplier assumes that the marginal propensity to consume (MPC) remains constant. In reality, MPC can change, and this affects the working of the multiplier.
2. Excess capacity in consumer goods industries: The multiplier works effectively only if there is surplus productive capacity in consumer goods industries. Without excess capacity, consumption cannot increase as required, which restricts the multiplier effect.
3. Less than full employment level: The concept of the multiplier assumes that the economy is operating below full employment. If full employment exists, any increase in investment will not significantly raise income or output but rather cause inflationary pressures.
4. Net increase in expenditure/Continuous investment: The multiplier effect will operate only if there is a continuous flow of new investments. If investment inflows are not sustained, the multiplier effect slows down or stops.