Macro: Automatic Stabilizers

Which of the following is an example of an automatic stabilizer that helps control inflation?

An increase in income tax revenue collected

How do automatic stabilizers affect an economy during inflationary periods?

As national income increases, tax revenues increase, which slows consumption spending

Hamsterville has a progressive income tax and a social insurance program that provides unemployed workers with a basic income while they are searching for jobs. What impact will this progressive tax system have on real GDP?

Decrease real GDP during the expansion phase; increase real GDP during the recession phase

Which of the following best describes an automatic stabilizer that will help Lincolnland recover from a recession?

Government transfer programs, such as unemployment benefits

The economy of Hamiltonia is experiencing a severe recession. Which of the following actions will occur automatically to increase employment and output without requiring any action by the government of Hamiltonia?

Income tax collected will decrease.

Which of the following is an example of an automatic stabilizer that can reduce the effect of a recession on output?

Institutions such as paying unemployment compensation

Tax revenues are an example of an automatic stabilizer. Which of the following best describes changes in unemployment and real GDP that cause tax revenue to increase?

Real GDP is higher than full employment output; unemployment is lower than the natural rate

Which of the following best describes how taxes work as an automatic stabilizer during a recession?

Tax revenues automatically decrease as GDP falls, which prevents consumption and real GDP from falling further

Gross domestic product (GDP) in Marthland is decreasing, plunging Marthaland into a recession. How will the response of automatic stabilizers to decreasing GDP in Marthaland affect the economy of Marthaland?

Tax revenues will decrease without governmental action, which will keep consumption and output from falling further.

Which of the following best describes the function of automatic stabilizers in an economy?

They decrease tax revenues when gross domestic product decreases

Lincolnland has a progressive income tax and a social insurance program that provides unemployed workers with a basic income while they are searching for jobs. The country experienced a shock and is now producing real GDP equal to Y2, as indicated in the AD-AS model shown here. Which of the following best describes what will happen to transfer payments and income taxes as a result of the decrease in AD?

Transfer payments will increase; taxes will decrease