Transfer payments that use income to establish eligibility act as automatic stabilizers.

Question

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Transfer payments that use income to establish eligibility, such as unemployment benefits or food stamps, automatically increase during a recession when more people become eligible due to job losses or lower income levels. This provides a stabilizing effect on the economy by increasing the purchasing power of those in need and stimulating demand for goods and services. Conversely, during economic expansions, fewer people may be eligible for these programs and the transfer payments may decrease, helping to prevent overheating of the economy.

Transfer Payments That Use Income to Establish Eligibility Act as Automatic