If the government changes transfer payments ($\overline{TR}$), autonomous spending ($\bar A$) will change by?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → $c *ΔTR$
Transfer payments (TR̄) made by the government — such as pensions, unemployment benefits, or subsidies — affect disposable income of households. When disposable income increases, consumption increases by a fraction of that amount, determined by the marginal propensity to consume (c).
Hence, the change in autonomous spending (ΔĀ) due to a change in transfer payments is:
ΔĀ =$c *ΔTR$
because only a portion c (the MPC) of the transfer payment is spent on consumption, while the rest (1 – c) is saved.