What is the role of automatic stabilizers in fiscal policy?
Practice Questions
Q1
What is the role of automatic stabilizers in fiscal policy?
To increase taxes during a recession
To decrease government spending during a boom
To automatically adjust government spending and taxes
To eliminate budget deficits
Questions & Step-by-Step Solutions
What is the role of automatic stabilizers in fiscal policy?
Step 1: Understand what fiscal policy is. Fiscal policy refers to how the government uses spending and taxes to influence the economy.
Step 2: Learn about automatic stabilizers. These are programs that automatically change government spending and taxes without needing new laws.
Step 3: Identify examples of automatic stabilizers. Common examples include unemployment benefits (which increase when more people are unemployed) and progressive taxes (where tax rates increase as income increases).
Step 4: See how they work in the economy. When the economy is doing poorly, more people receive unemployment benefits, which helps them spend money and support the economy.
Step 5: Understand the opposite effect. When the economy is doing well, people earn more and pay higher taxes, which helps cool down the economy and prevent inflation.
Step 6: Conclude that automatic stabilizers help smooth out economic fluctuations by automatically adjusting spending and taxes based on current economic conditions.
