If government purchases decrease so the budget may be balanced, some government transfers will automatically increase, reducing the multiplier effect.

Question

Quizplus · Accepted Answer

Government transfers, such as unemployment benefits and welfare payments, act as automatic stabilizers in the economy. When government purchases decrease, individuals who receive these transfers may have increased need for them, leading to an automatic increase in the transfer payments. However, these transfers have a lower multiplier effect compared to government purchases, meaning their impact on GDP is not as significant. Therefore, a decrease in government purchases can lead to a decrease in the overall multiplier effect in the economy.

If Government Purchases Decrease So the Budget May Be Balanced