A $50 billion increase in government transfer payments will have the same initial impact on aggregate demand as a $50 billion increase in direct government spending on goods and services, assuming all other factors remain constant.
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Comparing Fiscal Policy Effectiveness
An economy faces a recessionary gap caused by a significant drop in household consumption. To stimulate the economy, policymakers are considering two options of equal dollar value: a direct increase in government spending on infrastructure or a decrease in personal income taxes. Which statement accurately analyzes the initial impact of these two policies on aggregate demand?
A $50 billion increase in government transfer payments will have the same initial impact on aggregate demand as a $50 billion increase in direct government spending on goods and services, assuming all other factors remain constant.
Mechanism of Indirect Fiscal Policy