How might increasing the level of government transfers reduce the size of the economic pie? check all that apply. people may devote more time and energy to avoidance of taxes necessary to finance increased transfer payments. increased transfer payments may divert productive resources into producing more goods and services. higher taxes may be necessary to finance increased transfer payments, leading to a reduction in hours worked because of a decrease in the reward for productive activity?

When government increases the level of government transfers, it have to mobilize additional resources. This mobilization of additional resources induces the government to raise taxes or borrow more. Higher borrowing, at present, also translates in to higher taxes albeit in future time period.

So, government has to resort to tax increase in order to increase the level of government transfer.

However, such higher taxes induce the workers to work less as they realize that their productive endeavors in face of tax increase is not culminating in enough rewards.

Secondly, as taxes rise, people resort to ways that can help them in avoiding higher taxes. This means instead of devoting resources for productive uses they utilize them for unproductive or rent-seeking (tax avoidance) activities.

Both these consequences of higher taxes results in lower production and shrinking of economic pie.

Hence the answers are 1) Higher taxes may be necessary to finance increased transfer payments, leading to a reduction in hours worked because of a decrease in the reward for productive activity. and 2) Greater transfer activity diverts productive resources into rent-seeking activity.

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