Quick vid on auto-stabilizers [nicely explained]. http://www.youtube.com/watch?v=hhQygVx6V5M&feature=related Which of the following is most likely to be described as an automatic fiscal policy stabilizer? A) Increase in government spending on defense. B) Cuts in government spending on interstate highways. C) Cuts in the Federal Funds target rate. D) A fixed income tax rate. -------- When an economy dips into a recession, automatic stabilizers will tend to alter government spending and taxation so as to: A) reduce the budget deficit (or increase the surplus). B) enlarge the budget deficit (or reduce the surplus). C) ensure that the budget will remain in balance. D) reduce interest rates, thus stimulating aggregate demand.
def D for the first one I think B for the second. Govt spends more on unemployment, receives less from taxes from a reduction in the wage rate
D) A fixed income tax rate They collect fewer taxes during periods of economic downturns, and more taxes during economic upswings. B) Enlarge the budget deficit Automatic stabilizers do as their name suggests. Food stamps, unemployment benefits, etc. increase during recessions, thereby increasing the deficit.
D and B are correct. Thanks for explanation.
A fixed, progressive, income tax rate is a better answer???
It is automatic because it “automatically” takes a larger proportion from rich and a smaller proportion from the “not so rich.” In booming periods, the tax revenue “automatically” increases and in periods of contraction it decreases. The way I understand automatic stabilizers is that they work on their own. This about unemployment benefits, they increase on their own in a bad economy (high unemployment) and decrease in the opposite scenario. Government doesn’t intervene per say.