To encourage formation of small businesses, the government could provide subsidies; these subsidies

Question

a. would be included in GDP because they are part of investment expenditures.
b. would be included in GDP because they are part of government purchases.
c. would not be included in GDP because they are transfer payments.
d. would not be included in GDP because the government raises taxes to pay for them.

Answer 1

The correct answer is:

c. would not be included in GDP because they are transfer payments.

Subsidies are considered transfer payments because they do not result in the production of goods or services. Instead, they are funds given to individuals or businesses to encourage certain behaviors or activities without any corresponding output. Therefore, they are not counted in the calculation of GDP.