Suppose the economy was at full employment GDP and then consumer optimism soars. If automatic stabilizers are in place, the stabilizers will result in:

Question

Quizplus · Accepted Answer

Automatic stabilizers work to stabilize the economy by offsetting changes in aggregate demand. If consumer optimism increases, this could lead to an increase in aggregate demand and potentially inflation. In this case, automatic stabilizers would work to slow down the growth in real GDP by increasing tax collections and decreasing government spending on transfer payments, such as welfare or unemployment benefits. This would help reduce aggregate demand and mitigate the potential inflationary effects of increased consumer optimism.

Suppose the Economy Was at Full Employment GDP and Then