Automatic stabilizers decrease the impact of a recession on the level of economic activity because they
A)reduce the interest rate and so allow firms to increase their level of investment.
B)increase taxes so the budget is always balanced.
C)raise the exchange rate so U.S.exports become more attractive to foreigners.
D)mean disposable income does not change by as much as real GDP.
E)increase the quantity of money in circulation.

Question

Quizplus · Accepted Answer

Automatic stabilizers are measures built into the economy that automatically adjust taxes and transfer payments in response to changes in economic activity. During a recession, taxes decrease and transfer payments increase, leading to a smaller decrease in disposable income compared to the decrease in real GDP. This helps to stabilize the economy by reducing the impact of the recession on household spending. Therefore, choice D is the best answer as it correctly describes the impact of automatic stabilizers on disposable income.

Automatic Stabilizers Decrease the Impact of a Recession on the Level