How Does an Increase in Government Transfer Payments Affect Aggregate

question 39

Multiple Choice

How does an increase in government transfer payments affect aggregate demand?

• A)It has the same effect as a tax increase, which lowers AD with a larger multiplier than a spending decrease.
• B)It has the same effect as a tax cut, which increases AD but with a smaller multiplier than a change in spending.
• C)It has the same effect as a spending increase, which increases AD with a larger multiplier than a tax cut.
• D)It has the same effect as a spending decrease, which increases AD with a larger multiplier than a spending decrease.

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Definitions:

Opportunity Cost

Represents the benefit that is missed or given up when an investor, individual, or business chooses one alternative over another.

Ticket Price

The cost associated with purchasing a ticket to gain entry to an event, performance, or mode of transportation.

All You Can Eat

A service model where diners pay a set fee to consume as much food as they desire from a specific selection.

Consumption

The use of goods and services by households.