The multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

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Transfer payments are payments made by the government to individuals or households without any corresponding production of goods or services. Examples include social security checks and unemployment benefits. While these payments can stimulate demand and consumption, some recipients may choose to save some of the money rather than spending it immediately. In contrast, an increase in government purchases of goods and services directly stimulates production and employment, leading to a larger multiplier effect.

The Multiplier Effect of an Increase in Transfer Payments Is