Automatic fiscal policy is at work if, as real GDP increases, _________.
A) tax revenues increase and transfer payments decrease
B) transfer payments decrease and interest rates decrease
C) transfer payments increase and tax revenues decrease
D) tax revenues decrease and interest rates increase

Question

Quizplus · Accepted Answer

As real GDP increases, automatic stabilizers such as progressive income taxes cause tax revenues to increase. Additionally, expanding economic activity decreases the number of individuals who are unemployed and eligible for transfer payments such as unemployment benefits, leading to a decrease in transfer payments. Therefore, choice A is the correct answer.

Automatic Fiscal Policy Is at Work If, as Real GDP