Question

Which of the following elements of automatic fiscal policy tends to add to the federal budget deficit as the economy sinks into recession?

		A decrease in revenues from income taxes
		A decrease in corporate profit tax revenues
		An increase in payments for unemployment compensation
		All of the above

Elements of fiscal policy that move the budget toward surplus as the economy expands and toward deficit as it contracts are called ________.

		Automatic stabilizers
		Autonomous fiscal policy
		Accommodating budget policy
		Crowding-out effects

Answer 1

(1) Option (4)

During recession, personal tax revenue and corporate tax revenue both decrease, while government purchases increases, together increasing the budget deficit.

(2) Option (1)

Tax revenue and government purchases are two automatic stabilizers. During recession, personal tax revenue and corporate tax revenue both decrease, while government purchases increases, together increasing the budget deficit. During expansion, personal tax revenue and corporate tax revenue both increase, while government purchases decreases, together decreasing the budget deficit (or increasing budget surplus).