Answer to Question #137248 in Macroeconomics for OWUSUAA

Question

Why will the multiplier effect of government transfer payments, such as child benefit,
pensions and social security benefits be less than the full multiplier effect from government
expenditure on goods and services?

Answer 1

Multiplier effect is an increase in spending which triggers an increase in national income and consumption. Government payment transfer is less productive as it increases revenue deficit of government and may increase demand side inflation as consumers spending increase. Children and old people are nonproductive or less productive for economy and thus less multiplier effect. While government spending on producing goods and services gives job and employment which in return generates new capital thus increasing asset of government, thus have more multiplier effect. Also maintain supply of goods and services, which keeps inflation in check and balance. Thus, more increasing effect on GDP.