During an expansion, which of the following occur because of automatic stabilizers?
I. Income tax revenues tend to rise.
II. Government transfer payments tend to rise.
III. The government's budget deficit tends to fall or its budget surplus tends to rise.
IV. They tend to amplify the rise in real GDP.

Question

During an expansion, which of the following occur because of automatic stabilizers? 
I. Income tax revenues tend to rise.
II. Government transfer payments tend to rise.
III. The government's budget deficit tends to fall or its budget surplus tends to rise.
IV. They tend to amplify the rise in real GDP.

Quizplus · Accepted Answer

During an expansion, people tend to earn more income, which leads to higher income tax revenue. Additionally, automatic stabilizers such as unemployment insurance and welfare programs tend to increase government transfer payments. However, automatic stabilizers do not amplify the rise in real GDP, and in fact, they may have a dampening effect on the rise in real GDP. The government's budget deficit tends to fall or its budget surplus tends to rise because of the increased tax revenue and decreased transfer payments.

During an Expansion, Which of the Following Occur Because of Automatic