Automatic stabilizers counteract business cycles, and steer the economy back towards potential GDP.

Question

Quizplus · Accepted Answer

Automatic stabilizers, such as unemployment benefits and progressive income taxes, help to stabilize the economy during recessions by increasing government spending and decreasing tax revenues, which stimulates aggregate demand and counters the negative effects of the business cycle. Conversely, during periods of economic expansion, automatic stabilizers decrease government spending and increase tax revenues, which helps to prevent overheating and inflation by slowing down aggregate demand. Overall, automatic stabilizers can help to steer the economy back towards potential GDP by reducing the severity of business cycle fluctuations.

Automatic Stabilizers Counteract Business Cycles, and Steer the Economy Back