Assume the economy is initially in equilibrium with real GDP equal to potential GDP.Other things equal,if the economy enters a recession,automatic stabilizers
A) reduce the magnitude of the multiplier and reduce the size of the decline in real GDP.
B) reduce the decline in investment expenditures and therefore increase the real short-term interest rate.
C) cause any decrease in real GDP to be offset by an equal decrease in the inflation rate.
D) raise the interest rate to prevent the output gap from falling below equilibrium.

Question

Quizplus · Accepted Answer

Automatic stabilizers such as progressive income taxes and unemployment insurance increase government spending and decrease taxes during a recession, which helps to mitigate the decline in real GDP. This reduces the magnitude of the multiplier and helps to stabilize the economy. Therefore, option A is the correct answer. The other options are not related to the effects of automatic stabilizers during a recession.

Assume the Economy Is Initially in Equilibrium with Real GDP