Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues
A) increase and transfer payments decrease.
B) decrease and transfer payments increase.
C) and transfer payments both decrease.
D) and transfer payments both increase.

Question

Quizplus · Accepted Answer

Built-in stability, or automatic stabilizers, work to dampen economic fluctuations without any new government policy. As real GDP decreases, income tax revenues decrease because individuals and businesses earn less and therefore pay less in taxes. At the same time, transfer payments (like unemployment benefits and welfare) increase because more people qualify for these programs during economic downturns. This automatic response helps to stabilize the economy by increasing spending (through higher transfer payments) and decreasing the tax burden during recessions.

Which of the Following Is an Example of Built-In Stability