Which of the Following Best Explains Why a $10 Billion

question 131

Multiple Choice

Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases?

• A) An increase in government purchases can be paid for with a bond issue while transfer payments must be funded by taxes.
• B) An increase in transfer payments can be paid for by borrowing, but an increase in government purchases must ultimately be funded by tax increases.
• C) Households save part of an increase in income while the entire increase in government purchases represents additional spending.
• D) An increase in transfer payments does not create a multiplier effect, but an increase in government purchases does.

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