Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues:
A) Increase and transfer payments decrease
B) Decrease and transfer payments increase
C) And transfer payments both decrease
D) And transfer payments both increase

Question

Quizplus · Accepted Answer

Built-in stability refers to the automatic stabilizers that stabilize the economy without any government action. Income tax revenues are an example of built-in stability because as real GDP decreases, income tax revenues decrease due to lower income levels. This helps to reduce the negative impact on households and stabilize the economy. At the same time, transfer payments like unemployment benefits increase to provide support to those who have lost their jobs, which also stabilizes the economy. Therefore, the correct answer is B as it states that income tax revenues decrease and transfer payments increase, which is in line with the concept of built-in stability.

Which of the Following Is an Example of Built-In Stability