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 ?

The correct answer is B, 2 only. Government spending adds to income more than an equal transfer, and its effect is smaller when money supply is not expanded alongside it. When the government buys goods worth ₹ X, the whole amount becomes someone's income at once and then multiplies through further spending. A transfer of ₹ X to households is different: people save part of it and spend only the rest, so the first round is smaller. This is why the spending multiplier, 1/(1 − MPC), is larger than the transfer multiplier, MPC/(1 − MPC). If the extra spending is not backed by more money, higher demand for money pushes up interest rates and cuts private investment, the crowding-out effect, so the rise in income is smaller. Option A is wrong because statement 1 has the comparison the wrong way round. Option C is wrong because statement 1 is false. Option D is wrong because statement 2 is a correct description of crowding out. Exam tip: spending multiplier 1/(1 − MPC) is greater than transfer multiplier MPC/(1 − MPC); no new money means crowding out.