Consider the following statements about government transfer payments:
(A) A part of any increase in transfer payments is saved.
(B) Transfers affect the relation between income and disposable income.
(C) An increase in transfers raises autonomous spending by the full amount of the increase.
(D) With a marginal propensity to consume of 0.75, the transfer multiplier is 3.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (B) and (D) only
A transfer adds to disposable income, but households spend only a part c of it.
(A) A part of any increase in transfer payments is saved. — Correct. Only c of it is spent.
(B) Transfers affect the relation between income and disposable income. — Correct. Disposable income = Y − T + TR.
(C) An increase in transfers raises autonomous spending by the full amount of the increase. — Incorrect. Autonomous spending rises by only cΔTR.
(D) With a marginal propensity to consume of 0.75, the transfer multiplier is 3. — Correct. c/(1 − c) = 0.75 ÷ 0.25 = 3.
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. …” |