The multiplier process assumes that:

Question

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The multiplier process is based on the assumption that the economy is operating with sticky aggregate price levels, meaning that prices do not adjust immediately to changes in output or demand. This is because the multiplier process assumes that an increase in spending (such as government spending or investment) leads to a larger increase in output and income through subsequent rounds of spending, as increased income is spent and re-spent throughout the economy. If prices were perfectly flexible, then the initial increase in spending would immediately lead to an increase in prices, reducing the impact of subsequent rounds of spending. Additionally, the assumption of open trade or changing interest rates is not necessary for the multiplier effect to occur.

The Multiplier Process Assumes That