The multiplier theory does not operate as perfectly in reality as it would seem in theory. Following are the reasons or limitations affecting its peak performance.

Leakages
In the theory of the multiplier the income level increases through a series of consumption generated under marginal propensity to consume. Different leakages from a series of consumption reduce to which income should increase by the force of multiplier. Following are the leakages.

(a) With an increase in the income level of the people as a result of the increase investment, the people instead of spending in accordance with their MPC, use part of the increase in their incomes to pay off their old debts. Hence, the income does not increase to the required extent.
(b) When income increases due to an increase in investment, it results in a natural tendency for the general price level of commodities prevailing in a country to rise. Hence, part of income leaks out due to inflation because the purchasing power of people is considerably reduced as a result of inflation.
(c) With an increase in government expenditure the income increases to a multiplier extent. However, this may leave an adverse effect on the investment in the private sector. The consequent decrease in private investment may reduce the income to the same multiplier extent. Thus there is no net effect on the national income. Hence, it is another form of leakage.
(d) When the people hoard money with the intention of utilizing it after some time, the hoarded money is to be considered as a temporary leakage from income stream.
(e) The amount of the multiplier assumes the economy to be a closed one. But in real life all economists are open and thus in an open economy whatever spent on imports increases the consumption level of the country which exported the goods. But it results in the consumption level of home country to fall. Hence, expenditure on, imports is a leakage because it reduces the consumption level of the home country.

Changes in the MPC
The multiplier theory is based on the assumption that the MPC remains constant within the short run. However, practically it may change even in the short run. This is due to the change which might occur in the pattern of income distribution in the short run. Hence, the numerical value of the multiplier may also change in the short run.

Continuous Increase in Investment
There should be a continuous increase in the level of investment as it is required to maintain the increased level of saving and investment so as to have a multiple increase in the national income in future. However, if the lever of additional investment is not maintained national income would fall down to the previous level.

Time Lag
The multiplier theory explains that there will be a spontaneous increase in the national income as a result of an increase in investment. However, in reality this is not so. This is due to the fact that when investment increases, part of goods and services take time to be manufactured and later on the distribution or rewards to factors also take time. Then there exists the time leg in the demand for the goods and services. Hence, there is a considerable time leg between increase in investment and the consequent increase in national income, which has clearly been ignored in the multiplier theory.

Different Multiplying Processes in the Phases of a Cycle
In reality the numerical value of the multiplier does not remain constant throughout the four phases of a cycle. During the phase of expansion/boom, the MPC is generally high and so would be the value of multiplier. Conversely during a period of depression, the MPC is very low as would be the value of the multiplier.

Growth of Induced Investment in Excluded
The multiplier theory deals with a change in autonomous investment and the consequent change in National Income. It completely ignores the change in induced investment. In fact when autonomous investment goes up, so does the national income level through an increase in consumption according to MPC. The increase in consumption results in a tendency to increase the induced investment and therefore, the national income increases to a larger extent than the actual increase as stated by the multiplier theory. Hence, induced investment should have been included in the concept of multiplier to arrive at a more accurate measurement of increase in the national income.

Marginal Propensity to Spend
This is contrast to MPC: as marginal propensity to spend means the expenditure on both consumer as well as capital goods whereas MPC only refers to consumer goods. Some economists believe that the initial change in investment does not only affect consumption but also investment. Hence, they say that the theory of multiplier should be based on the marginal propensity to spend instead of the MPC.