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?
- A. 1 only
- B. 2 only ✓
- C. Both 1 and 2
- D. Neither 1 nor 2
Correct Answer: B. 2 only
Explanation
Statement 2 is correct as government spending without money supply expansion may be offset by higher interest rates. Statement 1 is incorrect because direct government spending generally has a stronger multiplier effect than transfers.
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