Which of the following scenarios is an example of an automatic stabilizer?
A) Increased unemployment rates cause the government to pay out more in unemployment insurance.
B) Tax revenues increase due to a rise in nominal income during an economic expansion.
C) Unemployment rates are reduced during an economic expansion and so government spending on TANF payments decreases.
D) All of these scenarios exemplify automatic stabilizers.

Question

Quizplus · Accepted Answer

Automatic stabilizers are mechanisms in the economy that help stabilize economic fluctuations without the need for explicit action by policymakers. They work automatically to increase government spending and decrease taxes during economic downturns, and decrease spending and increase taxes during economic expansions. Option A exemplifies an automatic stabilizer because increased unemployment leads to increased government spending on unemployment insurance. Option B is not an example of an automatic stabilizer because it does not involve government intervention. Option C is the opposite of an automatic stabilizer because it suggests that government spending decreases during an economic expansion, but automatic stabilizers increase government spending during economic downturns. Therefore, option D is the correct answer as all the scenarios listed are examples of automatic stabilizers.

Which of the Following Scenarios Is an Example of an Automatic