An automatic stabilizer _____
A) increases inflationary pressure during expansions.
B) increases the drop in disposable income during recessions and increases the jump in disposable income during expansions.
C) reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions.
D) increases tax revenue relative to government spending throughout the business cycle.
E) decreases tax revenue relative to government spending throughout the business cycle.

Question

Quizplus · Accepted Answer

Automatic stabilizers, such as the progressive income tax system and unemployment insurance, work to automatically increase government spending and reduce taxes during economic downturns, which helps to stabilize the economy by reducing the drop in disposable income and maintaining consumer spending. During economic expansions, these automatic stabilizers work in reverse, reducing spending and raising taxes, which reduces the jump in disposable income and helps to prevent inflationary pressures. Therefore, automatic stabilizers reduce the drop in disposable income during recessions and reduce the jump in disposable income during expansions.

An Automatic Stabilizer _____