Question

Which of the following is true?

Select one:

a. Automatic stabilizers are used to eliminate recessions.

b. Discretionary fiscal policy cannot eliminate a recession.

c. Automatic stabilizers make discretionary policy more effective by increasing the magnitude of the multipliers.

d. Discretionary fiscal policy can automatically eliminate a recession.

e. Automatic stabilizers help to reduce the impact of a recession.

Answer 1

e is correct

Automatic stabilizers help to reduce the impact of a recession.

In a recession, economic growth becomes negative but automatic stabilizers will help to limit the fall in growth. With lower incomes, people pay less tax, and government spending on unemployment benefits will increase. OR

During recessions, government spending automatically increases, which raises aggregate demand and offsets decreases in consumer demand. Government revenue automatically decreases. During economic booms, government spending automatically decreases, which prevents bubbles and the economy from overheating.