During a boom expansionary economy, public assistance payments and unemployment compensation payments automatically decrease while income taxes automatically increase. Which of the following best describes the effect of these changes on aggregate demand?

Question

Quizplus · Accepted Answer

These changes act as automatic stabilizers, reducing the amount of money people have to spend (due to higher taxes and lower public assistance and unemployment payments), which in turn reduces aggregate demand compared to what it would be without these adjustments. This helps to prevent the economy from overheating during a boom.

During a Boom Expansionary Economy, Public Assistance Payments and Unemployment