A decrease in transfer payments will result in
A) a decrease in both consumption and labor supply.
B) a decrease in consumption and an increase in labor supply.
C) an increase in consumption and a decrease in labor supply.
D) an increase in both consumption and labor supply.

Question

Quizplus · Accepted Answer

Transfer payments are payments made to individuals by the government for various purposes such as social welfare, unemployment benefits, etc. A decrease in transfer payments means that individuals receiving those payments would have less income to spend on consumption. Therefore, there would be a decrease in consumption. However, as individuals have less income, they may be incentivized to increase their labor supply by seeking more work or working longer hours to make up for the decrease in transfer payments. Thus, there would be an increase in labor supply.

A Decrease in Transfer Payments Will Result in