Suppose the government never borrows, so that it always finances its expenditures with taxes. Suppose further that government spending does not depend on income. In this case:

Question

Quizplus · Accepted Answer

Automatic stabilizers are economic policies and programs, such as progressive taxes and welfare, that automatically adjust to counteract economic fluctuations without direct intervention by policymakers. In this scenario, since government spending does not depend on income and is financed entirely by taxes without borrowing, it does not automatically adjust to economic changes. Therefore, neither government spending nor taxes act as automatic stabilizers in this context.

Suppose the Government Never Borrows, So That It Always Finances