Question

which of the following is an example of an automatic stabilizer?

a. The reduction in the money supply that occurs as banks become less willing to make loans during a recession

b. The fall in unemployment benefits that occurs as a result of growth in real GDP

c. The increase in government spending that occurs as a result of new spending bills passed by Congress

d. The reduction in real wages that occurs as the economy goes into a recession

Answer 1

Automatic stabilizers offset fluctuations in economic activity without any direct intervention from the part of policymakers. Here the fall in unemployment benefits that occurs as a result of growth in real GDP is an example of automatic stabilizer as when real GDP is increasing there is more employment and as a unemployment benefits given will automatically reduce. All other examples shows intervention into the economy and hence is not an automatic stabilizer. Hence the answer is option (b)