Transfer multiplier
Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Class 12, Ch 5 "Government Budget and the Economy"
Meaning
The transfer multiplier shows how much equilibrium income changes when government transfers (TR) rise by one unit. Transfers are payments such as pensions or cash support, where the government gets no good or service back. A transfer does not add to demand directly. It first raises people's disposable income. People spend only a part of it (c) and save the rest, so the first round of new demand is cΔTR, not ΔTR.
Transfer multiplier = c/(1 − c)
It is always one less than the government expenditure multiplier, 1/(1 − c). It has the same size as the tax multiplier, but with a positive sign.
Example
In NCERT Example 5.3, c = 0.75, so the transfer multiplier is 0.75/0.25 = 3. A rise in transfers of 20 raises income by 60. A rise in government purchases of 20 raises it by 80.
Don't confuse with
- Government expenditure multiplier: government purchases (G) enter AD directly, so the full amount counts in the first round. That is why this multiplier is bigger.
Related concepts
- Fiscal policy
- Lump-sum tax
- Government expenditure multiplier
- Tax multiplier
- Balanced budget multiplier
- Fiscal multiplier