An automatic stabilizer:
A)increases inflationary pressure during expansions.
B)Increases the drop in disposable income during recessions and increases the jump in disposable income during expansions.
C)reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions.
D)increases tax revenue relative to government spending throughout the business cycle.
E)decreases tax revenue relative to government spending throughout the business cycle.

Question

Quizplus · Accepted Answer

An automatic stabilizer is a government program or policy that works to stabilize the economy by reducing the impact of economic fluctuations. Option C is the correct answer as it reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions. This happens because automatic stabilizers such as unemployment benefits, welfare programs and progressive tax systems tend to transfer buying power from those who have greater income and spending power to those with less spending power, thereby boosting spending and reducing the severity of economic fluctuations.

An Automatic Stabilizer