Automatic fiscal policy occurs
A) because monetary policy is effective.
B) because tax revenues and transfer payments fluctuate with real GDP.
C) because government expenditures on goods and services fluctuate with real GDP.
D) when the Congress makes changes to transfer payment programs.

Question

Quizplus · Accepted Answer

Automatic fiscal policy refers to changes in government spending and taxation that occur without deliberate action by the government, typically in response to changes in economic conditions. Tax revenues naturally fluctuate with the economy because, as real GDP increases, incomes rise, leading to higher tax revenues. Similarly, certain transfer payments (like unemployment benefits) decrease as the economy improves, since fewer people are unemployed. This automatic adjustment helps stabilize the economy without the need for new legislation or explicit government intervention.

Automatic Fiscal Policy Occurs