Because of automatic fiscal policy, when real GDP decreases
A) government expenditures decrease and tax revenues increase.
B) government expenditures increase and tax revenues decrease.
C) government expenditures equal tax revenues.
D) the economy will automatically go to full employment.

Question

Quizplus · Accepted Answer

Automatic fiscal policy involves mechanisms that counteract economic fluctuations without the need for explicit government action. When real GDP decreases, automatic stabilizers cause government expenditures (e.g., unemployment benefits) to increase and tax revenues to decrease (since incomes are lower, leading to lower tax collections). This helps to cushion the economy against the downturn.

Because of Automatic Fiscal Policy, When Real GDP Decreases