During a recession, total public assistance payments and unemployment compensation payments automatically increase while income taxes automatically decrease. Which of the following best describes the effect of these changes on aggregate demand?
A)Aggregate demand will be less than it would be without these automatic stabilizers.
B)Aggregate demand will be the same as it was before the recession.
C)Aggregate demand will be more than it would be without these automatic stabilizers.
D)Aggregate demand will be greater than it was before the recession.

Question

During a recession, total public assistance payments and unemployment compensation payments automatically increase while income taxes automatically decrease. Which of the following best describes the effect of these changes on aggregate demand?
A)​Aggregate demand will be less than it would be without these automatic stabilizers.
B)​Aggregate demand will be the same as it was before the recession.
C)​Aggregate demand will be more than it would be without these automatic stabilizers.
D)​Aggregate demand will be greater than it was before the recession.

Quizplus · Accepted Answer

During a recession, people's incomes decrease causing them to spend less. However, with the increase in public assistance payments and unemployment compensation payments, there is an increase in people's disposable income leading to more spending, and thereby increasing the aggregate demand. Similarly, the decrease in income taxes also leads to an increase in disposable income and hence more spending, further increasing the aggregate demand. Therefore, the automatic stabilizers help to increase aggregate demand, making option C the correct answer.

During a Recession, Total Public Assistance Payments and Unemployment Compensation