The graph below shows the initialaggregate demand (AD1), short-run aggregate sup

Question

The graph below shows the initialaggregate demand (AD1), short-run aggregate supply (SRAS), andlong-run aggregate supply (LRAS) curves for a struggling economy.The government has decided to stimulate the economy by usingexpansionary fiscal policy, increasing aggregate demand from AD1 toAD2.

The graph below shows the initialaggregate demand (AD1), short-run aggregate supply (SRAS), andlong-run aggregate supply (LRAS) curves for a struggling economy.The government has decided to stimulate the economy by usingexpansionary fiscal policy, increasing aggregate demand from AD1 toAD2. 2.3. For simplicity, let's assume thatevery household has a marginal propensity to consume (MPC) of 0.75.What can you conclude about the effect of fiscal policy involvinggovernment purchases and fiscal policy involving governmenttransfers on aggregate demand? A. A change in government transfers of agiven size increases real GDP by the same amount as an equal-sizedchange in government purchases. B. A change in government transfers of agiven size has no multiplier effect; only changes in autonomousspending, like government purchases, can trigger a chainreaction. C. A change in government transfers of agiven size increases real GDP by more than an equal-sized change ingovernment purchases. D. A change in government transfers of agiven size increases real GDP by less than an equal-sized change ingovernment purchases.

Explanation / Answer

In my opinion: B.   A change in government transfers of agiven size has no multiplier effect; only changes in autonomousspending, like government purchases, can trigger a chainreaction. Because Government transfer simply redistribute the income,while government spending actually injects more into asystem. I also think that is the reason we might not find the answerfor the other, TR does not have a multiplier effect B.   A change in government transfers of agiven size has no multiplier effect; only changes in autonomousspending, like government purchases, can trigger a chainreaction.

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