Automatic stabilisers tend to stabilise the level of real GDP because:
A)Parliament quickly changes spending and tax revenue.
B)federal expenditures and tax revenues change as the level of real GDP changes.
C)the spending and tax multiplier are constant.
D)wages are controlled by the minimum wage law.

Question

Quizplus · Accepted Answer

Automatic stabilizers are the built-in economic features of the government budget that respond to changes in economic conditions such as changes in GDP, income or employment level more specifically without the need for any explicit changes to government policy. Federal expenditures and tax revenues change automatically as the level of real GDP changes, which helps to stabilize the economy. For example, when the level of GDP falls, government revenue from taxes falls, and government spending on unemployment benefits increases, which helps to stimulate aggregate demand and reduce the severity of the recession. Similarly, when the level of GDP rises, government revenue from taxes increases and government spending on unemployment benefits decreases, which helps to reduce inflationary pressures and stabilize the economy. Therefore, option B is the correct one. Options A, C, and D are incorrect because parliament cannot change spending and tax revenue so quickly, spending and tax multipliers are not always constant, and wages are not controlled by the minimum wage law for every worker in the economy.

Automatic Stabilisers Tend to Stabilise the Level of Real GDP