If aggregate output decreases, _____
A) federal budget deficit decreases.
B) tax revenue increases.
C) automatic stabilizers will tend to increase the size of the deficit.
D) automatic stabilizers will tend to decrease the size of the deficit.
E) transfer payments decrease as fewer people become eligible for public assistance.

Question

Quizplus · Accepted Answer

When aggregate output decreases, it typically leads to a decrease in tax revenue and an increase in transfer payments (i.e. unemployment benefits). This increase in transfer payments is due to automatic stabilizers, which are policies that automatically increase government spending and decrease taxes during economic downturns. As automatic stabilizers increase spending and decrease revenue, they tend to contribute to an increase in the federal budget deficit.

If Aggregate Output Decreases, _____