Which of the Following Best Explains Why a $10 Billion

Multiple Choice

Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases?

A) An increase in government purchases can be paid for with a bond issue while transfer payments must be funded by taxes.
B) An increase in transfer payments can be paid for by borrowing, but an increase in government purchases must ultimately be funded by tax increases.
C) Households save part of an increase in income while the entire increase in government purchases represents additional spending.
D) An increase in transfer payments does not create a multiplier effect, but an increase in government purchases does.