Question

QUESTION 62

1. Income taxes in the United States are part of automatic fiscal policy because

   		tax revenues increase when income increases, thus offsetting some of the increase in aggregate demand
   		tax revenues decrease when income increases, intensifying the increase in aggregate demand
   		the President can increase tax rates whenever the President deems such a policy appropriate
   		tax rates can be adjusted by the Congress to counteract economic fluctuations

Answer 1

Solution: tax revenues increase when income increases, thus offsetting some of the increase in aggregate demand.

Explanation: Automatic fiscal policy is designed to offset the fluctuations in the economic activities in a country via the normal operation without any additional or direct intervention by policymakers. During the boom less people are unemployed thus the government spending on benefits is declined, and as the incomes increases thus the government taxation through taxation will be high that offsets an increase in aggregate demand.