Question

An increase in transfer payments can be an expansionary demand-side policy. what are transfer payments?

A) Payments made by businesses to their suppliers to stimulate economic activity.
B) Payments made by the government to individuals or businesses without expecting goods or services in return.
C) Payments made by consumers to the government to fund public projects.
D) Payments made by financial institutions to borrowers to encourage spending.

Answer 1

The correct answer is option B) Payments made by the government to individuals or businesses without expecting goods or services in return.

Step-by-step explanation:

Transfer payments are a type of government expenditure that represents payments made by the government to individuals or businesses without expecting any goods or services in return. Examples include Social Security, disability benefits, welfare, and unemployment compensation. These payments enable recipients to participate in the economy and, when increased, can serve as an expansionary demand-side policy to stimulate economic activity during a recession by increasing aggregate demand.

When the government increases transfer payments, it directly impacts the recipients by increasing their disposable income, which in turn can lead to an increase in consumption and, therefore, aggregate demand. This mechanism is part of fiscal policy, which the government uses to regulate the economy's level of activity.

An expansionary fiscal policy, which involves increased government spending or tax reductions, is deemed most appropriate when the economy is in recession and producing below its potential GDP.