The multiplier effect of changes in government transfers is:
A)greater than the multiplier effect of a change in government spending.
B)zero because transfer payments do not affect aggregate demand.
C)less than the multiplier effect of a change in government spending.
D)impossible to determine.

Question

Quizplus · Accepted Answer

The multiplier effect of changes in government transfers is less than the multiplier effect of a change in government spending. This is because when the government spends money on goods and services, it directly adds to aggregate demand and leads to an increase in output and employment through the multiplier effect. However, when the government transfers money to individuals or businesses, the effect on aggregate demand is indirect and depends on how the recipients choose to spend or save the money. In general, the recipients of transfers may save a higher proportion of the money than the recipients of government spending, which reduces the multiplier effect of transfers relative to government spending.

The Multiplier Effect of Changes in Government Transfers Is