Which of the following statements about government transfer payments is NOT correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → The whole of any increase in transfer payments is spent on consumption.
A transfer adds to disposable income. Households spend a part c of it and save the rest, so not all of it is spent.
Option (1) A rise in transfer payments raises autonomous spending by c times the rise. — True. Only the part spent, cΔTR, enters autonomous spending.
Option (2) A rise in transfers raises output by less than an equal rise in government purchases. — True. Purchases enter spending in full; transfers enter only after part is saved.
Option (3) Transfers affect the relation between income and disposable income of households. — True. Transfers are added to income to give disposable income.
Option (4) The whole of any increase in transfer payments is spent on consumption. — False. A part of the rise is saved.
NCERT (2026-27): “Box 5.1: Fiscal Policy … The government directly affects the level of equilibrium income in two specific ways – government purchases of goods and services (G) increase aggregate demand and taxes, and transfers affect the relation between income (Y) and disposable income (YD) – the income available for consumption and saving with the households.” “Transfers: … so output will rise by less than the amount by which it increases when government expenditure increases because a part of any increase in transfer payments is saved. …” |