The most important automatic stabilizer is
A)open-market transactions.
B)the tax system.
C)unemployment compensation.
D)welfare benefits.

Question

Quizplus · Accepted Answer

The tax system is the most important automatic stabilizer as it adjusts itself during economic downturns. During a recession, individuals and businesses earn less income; hence, they pay reduced taxes to the government. This reduction in taxes automatically stabilizes the economy as it boosts aggregate demand while stimulating economic growth. Additionally, the tax system helps to provide stability during expansion phases, as higher incomes result in higher taxes payable, thereby stabilizing the economy by reducing excess aggregate demand.

The Most Important Automatic Stabilizer Is