How do transfer payments impact GDP in the context of fiscal policy and inflation effects?

Transfer payments are funds provided by the government to individuals without expecting anything in return, like unemployment benefits or social security. These payments themselves do not directly count as part of GDP because they are not payments for goods or services. However, they can influence GDP indirectly by increasing the income of recipients, which may lead to higher consumer spending. For example, if a person receives unemployment benefits, they might use that money to buy food and clothes, which contributes to economic activity and thus raises GDP. Additionally, during times of inflation, if transfer payments increase without a rise in production, it could put more money in circulation, potentially leading to higher prices.