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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Definitions:

Countercyclical Payments

Payments made by the government to individuals or businesses during economic downturns to stabilize the economy by increasing purchasing power.

Agricultural Exports

Goods that are produced through farming and agriculture that are sold to other countries.

Instability

The tendency of a system or market to experience unpredictable or erratic changes, potentially leading to chaos or disorder.

Demand

The desire and ability of consumers to purchase goods or services at various price levels, at a particular time.