Refer to the diagram, in which T is tax revenues and G is government expenditures. All ﬁgures are in billions. This diagram portrays the idea of
A) progressive taxation.
B) built-in stability.
C) the multiplier.
D) discretionary ﬁscal policy.

Question

Refer to the diagram, in which T is tax revenues and G is government expenditures. All ﬁgures are in billions. This diagram portrays the idea of
A) progressive taxation. 
B) built-in stability. 
C) the multiplier. 
D) discretionary ﬁscal policy.

Quizplus · Accepted Answer

The diagram represents built-in stability, which refers to the automatic stabilizers in the economy that help to offset fluctuations in economic activity. As seen in the diagram, during a recession, tax revenues (T) decrease due to lower incomes, while government expenditures (G) increase due to increased spending on programs such as unemployment insurance. This helps to stimulate economic activity and mitigate the impact of the recession. Conversely, during an expansion, tax revenues increase and government expenditures decrease, which helps to prevent overheating of the economy.

Refer to the Diagram, in Which T Is Tax Revenues