If the government increases its spending when the economy is expanding, automatic stabilizers _____ the government spending multiplier.
A)may or may not affect
B)will increase
C)will not affect
D)will decrease

Question

Quizplus · Accepted Answer

When the economy is expanding, tax revenues increase automatically because people and businesses earn more money and pay more taxes. At the same time, spending on programs like unemployment and welfare may decrease as fewer people need them. This means that the government's increased spending will have a smaller impact on aggregate demand because the automatic stabilizers are already working to stabilize the economy. Therefore, the government spending multiplier will be lower than if the automatic stabilizers were not in place, leading to a decrease in the multiplier.

If the Government Increases Its Spending When the Economy Is