Final answer:
A $100 increase in transfer payments or a $100 decrease in taxes will lead to increased disposable income for households and higher aggregate expenditure due to the multiplier effect, ultimately affecting the economy's output.
Step-by-step explanation:
A $100 increase in transfer payments or a $100 decrease in taxes will cause an increase in the aggregate expenditure in an economy. This is because such fiscal policy tools increase households' disposable income, enabling them to spend more. According to the multiplier effect, an original increase in government spending or decrease in taxes leads to cycles of spending. For instance, with a marginal propensity to spend of 57%, a GDP increase of $100 leads to an additional $57 in consumption. Similarly, a $300 tax cut could ultimately decrease national savings, increase aggregate demand, and result in higher interest rates as the supply of savings fails to meet the demand for loans.
If we take into account the multiplier effect, a $100 change in fiscal policy leads to more than a $100 change in aggregate expenditure. As illustrated, an original government spending increase of $100 raises aggregate expenditure by $213, meaning that the multiplier is 2.13. Consequently, such changes in fiscal policy can have significant impacts on an economy beyond the initial fiscal stimulus.