Question 1

What are automatic stabilizers (non-discretionary fiscal policy)?

Accepted Answer

Economic mechanisms that automatically increase or decrease government spending or taxation to stabilize the economy during economic ups and downs without requiring active policy changes

(support the economy during recessions and help prevent the economy from being overheated during expansionary periods; social security, progressive income tax, etc.)

Question 2

Why is the progressive income tax an automatic stabilizer?

Accepted Answer

When GDP is down, the tax burden on consumers is low, promoting consumption and increasing AD

When GDP is up, more tax burden on consumers, discouraging consumption and decreasing AD

Question 3

Why is the system of unemployment benefits an automatic stabilizer?

Accepted Answer

When GDP is down, unemployment is higher and more benefits will be paid out, increasing AD

When GDP is up, unemployment is low and fewer benefits will be paid out, decreasing AD

3.9 Automatic Stabilizers, AP Macroeconomics Flashcards