When output deviates from potential GDP, automatic stabilizers work to push the economy:
A) in the same direction that correctly timed and formulated discretionary policy would.
B) to lower rates of inflation.
C) away from risky financial investments.
D) None of these.

Question

Quizplus · Accepted Answer

Automatic stabilizers are built-in features of the economy that work to stabilize economic fluctuations without the need for explicit policy action. When output deviates from potential GDP, automatic stabilizers such as progressive income taxes and unemployment insurance work to automatically stabilize the economy by increasing government spending (through increased transfer payments) and reducing taxes. This helps to support consumption and aggregate demand and push the economy in the same direction that correctly timed and formulated discretionary policy would.

When Output Deviates from Potential GDP, Automatic Stabilizers Work to Push