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.

Question

Quizplus · Accepted Answer

An increase in government transfer payments has the same effect as a tax cut, which increases disposable income and therefore consumption spending, leading to an increase in aggregate demand. However, the multiplier effect of a tax cut is smaller than a change in government spending.

How Does an Increase in Government Transfer Payments Affect Aggregate