Question

Automatic stabilizers have the effect of __________.

Question 21 options:

	increasing long-run aggregate supply during an inflationary gap
	increasing long-run aggregate supply during a recessionary gap
	increasing aggregate demand during a recessionary gap
	increasing aggregate demand during an inflationary gap

Answer 1

Option 3

increasing aggregate demand during a recessionary gap

Automatic stabilizers are the ongoing policies of government works in opposite of business cycles.

Ex. Unemployment benefits, social security benefits, taxes, etc

If the economy in a recession the unemployment benefits increases and taxes decreases as the unemployment increases and income decreases. The automatic stabilizers increase the consumption capacity in recession and slow the effect of the recession. It also works for inflationary gaps where income increases so taxes increases and reduce consumption capacity.