Consider the following statements:
1. An additional spending by the Government of X is likely to have less impact on income than an additional transfer of X to households.
2. An additional spending by the Government of X is likely to have less impact on income if it is not accompanied by an expansion in money supply.
Which of the statements given above is/are correct?

Correct option is B

The correct answer is (b) 2 only.
An additional spending by the Government of X is likely to have less impact on income than an additional transfer of X to households: This statement is incorrect. Generally, government spending (such as on infrastructure projects, public services, or direct investment) tends to have a higher multiplier effect on the economy compared to direct transfers to households. This is because government spending directly creates jobs, stimulates demand for goods and services, and initiates a chain of economic activities, leading to a larger impact on overall income. Direct transfers, on the other hand, may not lead to an equivalent boost as households may save or repay debt instead of spending all the money received.
An additional spending by the Government of X is likely to have less impact on income if it is not accompanied by an expansion in money supply: This statement is correct. If the government increases spending without an expansion in the money supply, the full potential impact on income might not be realized. Without sufficient liquidity in the system, higher government spending could lead to higher interest rates due to increased government borrowing, which could crowd out private investment. Expanding the money supply ensures that there is enough liquidity in the economy to support increased spending and stimulate income growth effectively.
Information Booster:
● Government spending typically has a greater impact on economic activity and income compared to direct transfers, due to its immediate effect on demand and job creation. ● The money supply is crucial in determining the effectiveness of government spending; if not expanded appropriately, it may limit economic growth due to liquidity constraints. ● Direct transfers may not have the same economic impact as government spending because recipients may choose to save the money or use it for non-consumption purposes. ● A coordinated approach between fiscal policy (government spending) and monetary policy (expansion of the money supply) maximizes the economic impact of government initiatives.