Final answer:
Transfer payments are a form of government expenditure to individuals, not exchanging for goods or services, used to stimulate the economy as part of expansionary fiscal policy to increase aggregate demand.
Step-by-step explanation:
Transfer payments are a key component of expansionary fiscal policies aimed at increasing the level of aggregate demand. These payments are sums of money given by the government to certain individuals, such as beneficiaries of Social Security, disability, welfare, or unemployment compensation. The government does not receive any goods or services in return for these payments, but they enable recipients to spend more, thus participating in the economy and stimulating aggregate demand.
Expansionary fiscal policy can be enacted to counteract economic downturns, and it often involves increases in government spending and reductions in taxes to boost economic activity. By increasing transfer payments, the policy seeks to raise disposable income for individuals, thereby encouraging consumption. When the economy is in recession, or producing below its potential Gross Domestic Product (GDP), such expansionary measures can be especially appropriate as they help to fight recession and unemployment by moving the economy towards potential GDP.