Assume the economy is initially in equilibrium with real GDP equal to potential GDP.Other things equal,if the economy enters a recession and there are automatic stabilizers,the initial decrease in investment expenditure resulting from the recession is ________ what the decrease would be without automatic stabilizers,and the multiplier is ________ what the multiplier would be without automatic stabilizers.
A) less than; smaller than
B) greater than; larger than
C) equal to; smaller than
D) equal to; greater than

Question

Quizplus · Accepted Answer

Automatic stabilizers help to cushion the impact of a recession by reducing the severity of the decrease in investment expenditure, making it equal to what it would be without them. However, they also reduce the size of the multiplier effect, making it smaller than it would be without automatic stabilizers.

Assume the Economy Is Initially in Equilibrium with Real GDP