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?

Statement 1 is incorrect because government spending (G) has a larger multiplier effect than transfer payments. Government spending directly increases aggregate demand in the first round, whereas transfers (like tax cuts) only increase income after being filtered through the marginal propensity to consume (MPC) [2]. Since households save a portion of transfers, the initial impact on spending is less than the full amount of X [1]. Statement 2 is correct due to the 'crowding out' effect. If government spending is not accompanied by an expansion in money supply (monetary accommodation), the increased demand for money to finance the spending leads to higher interest rates. This reduces private investment and consumption, thereby dampening the overall impact on national income compared to a scenario where the money supply expands to keep interest rates stable .

Sources

1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Changes in Taxes > p. 74
2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > EXAMPLE 5.1 > p. 75