If the value of the multiplier is smaller, the economy
A)becomes less stable because automatic stabilizers have a larger impact.
B)becomes more stable because automatic stabilizers have a larger impact.
C)becomes more volatile because automatic stabilizers have a lesser impact.
D)is subject to larger fluctuations because automatic stabilizers have no impact.

Question

Quizplus · Accepted Answer

Automatic stabilizers, such as unemployment insurance and progressive income taxes, are designed to stabilize the economy by offsetting fluctuations in aggregate demand. A smaller multiplier means that changes in spending will have a smaller impact on aggregate demand, making the economy more prone to fluctuations. However, if automatic stabilizers are in place, they will have a larger impact relative to changes in spending, making the economy more stable. Therefore, choice B is the best answer.

If the Value of the Multiplier Is Smaller, the Economy