You would expect the increase in economic activity caused by a $10 billion increase in government purchases of goods and services to be:
A) completely offset by a $10 billion increase in transfer payments.
B) equal to the increase in economic activity caused by a $10 billion increase in transfer payments.
C) less than the increase in economic activity caused by a $10 billion increase in transfer payments.
D) greater than the increase in economic activity caused by a $10 billion increase in transfer payments.

Question

Quizplus · Accepted Answer

Government purchases of goods and services directly increase aggregate demand and economic activity because they are immediate expenditures that contribute to the economy. In contrast, transfer payments (such as social security, unemployment benefits, etc.) increase the income of individuals, who may not spend all of this additional income immediately. The marginal propensity to consume (MPC) suggests that only a portion of the income from transfer payments will be spent, making the impact on economic activity less than a direct government purchase of the same amount.

You Would Expect the Increase in Economic Activity Caused by a $10