If the economy is to have significant built-in stability, then when real GDP increases, the tax revenues should:
A) Fall proportionately more than the change in GDP
B) Fall proportionately less than the change in GDP
C) Rise proportionately more than the change in GDP
D) Rise proportionately less than the change in GDP

Question

Quizplus · Accepted Answer

If tax revenues increase proportionately more than the change in GDP, it means that the tax system has a progressive structure, where taxes increase at a faster rate than GDP growth. This type of tax system can act as a stabilizer for the economy, as it helps to reduce the growth-rate of GDP during economic booms by reducing disposable incomes, and conversely, it helps to increase the growth-rate of GDP during declines by giving households more disposable income to spend.

If the Economy Is to Have Significant Built-In Stability, Then