An increase in transfer payments combined with a decrease in government purchases would:

Question

Quizplus · Accepted Answer

The effect of an increase in transfer payments depends on the proportion of income that recipients of transfer payments save or spend. If they spend most of the additional income, AD would increase. However, if they save most of the additional income, AD would not be affected much. On the other hand, a decrease in government purchases would decrease AD, ceteris paribus. Therefore, the net effect of an increase in transfer payments combined with a decrease in government purchases on AD is indeterminate.

An Increase in Transfer Payments Combined with a Decrease in Government