If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures and taxes change as output falls?
A) Both government expenditures and taxes fall.
B) Both government expenditures and taxes rise.
C) Government expenditures rise and taxes fall.
D) Government expenditures fall and taxes rise.

Question

Quizplus · Accepted Answer

Automatic stabilizers refer to government policies that automatically adjust government expenditures and taxes in response to changes in the economy, without requiring deliberate action by policymakers. During an economic downturn, tax revenues fall as individuals and firms earn less income, leading to a decrease in government revenue. At the same time, government spending on programs such as unemployment insurance and welfare increases as more people become unemployed and require government assistance. This makes government expenditures rise and taxes fall, the best choice is C.

If There Are Automatic Stabilizers but No Deliberate Action by Policymakers