How do transfer payments and taxes affect aggregate spending?
A) Transfer payments and taxes affect aggregate spending directly, just as consumption does.
B) Transfer payments and taxes affect aggregate spending indirectly, by first changing disposable income and thereby changing consumption.
C) Transfer payments and taxes do NOT affect aggregate spending.
D) Transfer payments and taxes affect aggregate spending indirectly, by first changing national income and thereby changing consumption.

Question

How do transfer payments and taxes affect aggregate spending?  
A) Transfer payments and taxes affect aggregate spending directly, just as consumption does. 
B) Transfer payments and taxes affect aggregate spending indirectly, by first changing disposable income and thereby changing consumption. 
C) Transfer payments and taxes do NOT affect aggregate spending. 
D) Transfer payments and taxes affect aggregate spending indirectly, by first changing national income and thereby changing consumption.

Quizplus · Accepted Answer

Transfer payments and taxes directly impact disposable income, which affects consumption. Therefore, they indirectly affect aggregate spending by changing disposable income.

How Do Transfer Payments and Taxes Affect Aggregate Spending