Taxes and transfer payments automatically reduce fluctuations in real GDP and thereby stabilize the economy without any need for decisions from Congress or the White House.

Question

Quizplus · Accepted Answer

Taxes and transfer payments (such as Social Security and unemployment benefits) are automatic stabilizers that help offset changes in economic activity. When the economy is in a downturn, tax revenues tend to decline and transfer payments tend to increase, which injects more spending into the economy and can help stimulate growth. Conversely, when the economy is growing too fast and inflation becomes a concern, tax revenues tend to rise and transfer payments tend to decline, which helps cool off the economy. These automatic stabilizers work without any need for explicit decisions from Congress or the White House, although policymakers can still choose to adjust tax rates or spending levels if they see fit.

Taxes and Transfer Payments Automatically Reduce Fluctuations in Real GDP