Explanation Fiscal policy is the policy of the government regarding the government revenue and expenditures. The revenues include the taxes and the expenditures include the transfer payments and other government spending in the economy. The fiscal policy could be either expansionary or contractionary. The automatic stabilizers are the automatic changes that happen with the taxes and the government spending in the economy when there is a change in the real GDP . The automatic stabilizers assist in offsetting a recession when the real GDP falls and vice versa. Option (c): The automatic stabilizers are the changes in the taxes and government spending that automatically kicks in to the action when there is a change in the real GDP of the economy. Thus, when the economy enters into a recession, it will decrease tax rate and increase the government spending, which is the non-discretionary transfer payments. As a result, the revenue becomes lower than the expenditure creating a budget deficit in the economy. This means that option 'c' is the correct answer. Option (a): The automatic stabilizer decreases tax rate during the recession and increases the government spending such as the non-discretional transfers and payments...

The impact of automatic stabilizers when the economy enters a recession.

Economics For Today

10th Edition

ISBN: 9781337613040

Author: Tucker

Publisher: Cengage Learning

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Question

Chapter 21, Problem 10SQ

To determine

The impact of automatic stabilizers when the economy enters a recession.

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Similar questions

Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?
Is Medicaid (federal government aid to low-income families and individuals) an automatic stabilizer?
What is the main advantage of automatic stabilizers over discretionary fiscal policy?
Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy?
Explain how automatic stabilizers work, both on the taxation side and on the spending side, first in a situation where the economy is producing less than potential GDP and then in a situation where the economy Is producing more than potential GDP.
Is expansionary fiscal policy more attractive to politicians who believe in larger government or to politicians who believe in smaller government? Explain your answer.

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