Question:
What is the most accurate statement about the impact of transfer payments on fiscal policy?
(1) Transfer payments directly affect aggregate demand by increasing government expenditure.
(2) Transfer payments do not affect the budget deficit as they are not part of government expenditure.
(3) Transfer payments increase government spending without directly contributing to the production of goods or services.
(4) Transfer payments encourage economic growth by stimulating investment.
(5) Transfer payments can influence aggregate demand by reducing the disposable income of households.
Correct Answer:
(3)
Answer Explanation:
Transfer payments (like pensions or welfare) are unilateral payments made by the government for which no current goods or services are received in return. They are excluded from GDP calculations because they do not represent current production, but they do increase government outlays.
Topic: Public Finance Year: 2024
Leave a Reply