The most important automatic stabilizer is
A)open-market operations.
B)the tax system.
C)unemployment compensation.
D)welfare benefits.

Question

Quizplus · Accepted Answer

The tax system is the most important automatic stabilizer because as the economy slows down, people's incomes decrease, and as a result, they pay less in taxes. This reduction in tax revenue is automatic and helps to stabilize the economy. The opposite is also true: when the economy is doing well, people's incomes increase, and they pay more in taxes, which helps to stabilize the economy. The other options, such as unemployment compensation and welfare benefits, also play a role in stabilizing the economy, but they are not as significant as the tax system. Open-market operations, which refer to the buying and selling of government securities by the Federal Reserve, are not an automatic stabilizer but a tool used by the government to influence the economy.

The Most Important Automatic Stabilizer Is