Automatic fiscal policy is at work if, as real GDP increases,
A) transfer payments decrease and interest rates decrease.
B) transfer payments increase and tax revenues decrease.
C) tax revenues increase and transfer payments decrease.
D) tax revenues decrease and interest rates increase.

Question

Quizplus · Accepted Answer

Automatic fiscal policy involves changes in government spending and taxation that occur without deliberate action by policymakers. As real GDP increases, tax revenues typically increase because individuals and businesses earn more and thus pay more in taxes. At the same time, transfer payments (such as unemployment benefits) decrease because more people are working and fewer are claiming benefits. This combination helps to stabilize the economy without any direct intervention by the government.

Automatic Fiscal Policy Is at Work If, as Real GDP