Income tax acts as an automatic stabilizer because as people's incomes increase, they pay more in taxes, which can help to slow down an overheating economy by reducing the amount of disposable income available for spending. Conversely, during economic downturns, people earn less and pay less in taxes, which leaves them with more disposable income, helping to stabilize the economy by maintaining spending levels.

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The Income Tax Is

Question 92

Multiple Choice

The income tax is:

A) an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion.
B) an automatic stabilizer because income tax revenues rise as income increases, accelerating an economic expansion.
C) an automatic stabilizer because income tax revenues fall as income increases, accelerating an economic expansion.
D) not an automatic stabilizer.

Correct Answer: