View source for Finance:Transfer payments multiplier

In [[Finance:Keynesian economics|Keynesian economics]], the '''transfer payments multiplier''' (or '''transfer payment multiplier''') is the multiplier by which 
[[Aggregate demand|aggregate demand]] will increase when there is an increase in transfer payments (e.g., welfare spending, unemployment payments).<ref name="Macroeconomics and Business  ">{{cite book|last=Macdonald|first=Nadia Tempini |title=Macroeconomics and business  |year=1994 |pages=138|isbn=1-86152-450-1|url=https://books.google.com/books?id=MU3StwEAyz0C&q=Transfer+payment+multiplier&pg=PA138}}</ref> Transfer payments are not in the same theoretical category as [[Finance:Government spending|government spending]] on goods and services because such payments are not directly injected into a goods market. Instead, the spendable funds are transferred to a member of the public, who then may spend some or all of them. For this reason, transfer payments are analyzed as negative taxes, and their [[Finance:Multiplier (economics)|multiplier]] is usually considered to be equal in magnitude but opposite in sign (specifically positive rather than negative) from that of taxes.

One dollar of transfer payments results in up to one dollar of spending by the recipient. In turn, the recipient of that spending has experienced an increase in income and spends a portion of it on more goods, giving the next person income some of which is spent, etc. The result of this chain reaction may be that aggregate spending, and hence equilibrium [[Finance:GDP|GDP]], has gone up by more than the original dollar. However, the size of this multiplier effect is likely to be diminished by two considerations: first, an upward push that the new spending gives to [[Finance:Interest rate|interest rate]]s, which diminishes spending on goods such as [[Finance:Physical capital|physical capital]] and consumer durables; and second, an upward push that the spending gives to the general price level, which diminishes the quantity of [[Aggregate demand|aggregate demand]] for several reasons {{Citation needed|reason=it is just a personal opinion of the author|date=February 2023}}.

Because not all the original dollar is necessarily spent by the recipient of the transfer payment, the resulting multiplier is likely to be somewhat less than the [[Finance:Fiscal multiplier|multiplier of government spending]] on goods and services.

==See also==

*[[Finance:Complex multiplier|Complex multiplier]]

== Notes ==
{{reflist}}

== References ==
* [http://wpscms.pearsoncmg.com/wps/media/objects/5450/5581712/flashcards/flashcards.html ''Essential Foundations of Economics 4e'']
* [https://books.google.com/books?id=GkITLweZYZwC&dq=Transfer+payments+multiplier&pg=PA303 ''Economics of Social Issues'']

[[Category:Payments]]
[[Category:Keynesian economics]]



{{Sourceattribution|Transfer payments multiplier}}