The existence of automatic stabilizers will
A) reduce the recognition lag of discretionary fiscal policy.
B) eliminate recessions.
C) reduce the size of recessionary and inflationary gaps.
D) cause the effects of shocks to aggregate demand to have a larger effect on GDP.

Question

Quizplus · Accepted Answer

Automatic stabilizers are government policies that automatically stabilize economic fluctuations through changes in government spending or taxes. This means that during a recession, automatic stabilizers increase government spending (such as unemployment benefits) and decrease taxes (such as income tax) which helps to reduce the size of the recessionary gap. Conversely, during an inflationary period, the opposite happens where government spending decreases and taxes increase, which helps to reduce the size of the inflationary gap. Therefore, automatic stabilizers reduce the size of recessionary and inflationary gaps.

The Existence of Automatic Stabilizers Will