Question

During the Great Recession, the U.S. budget deficit worsened as tax collections fell and payments to the poor rose. In other words, the deficit worsened as a result of _________ in the federal budget.Choose one:

A. crowding-out
B. discretionary fiscal policy
C. automatic stabilizers
D. recognition lags
E. contractionary fiscal policy

Answer 1

C. automatic stabilizers

Step-by-step explanation:

Reduced tax collections and increased transfer payments during recessions are the results of automatic stabilizers.

They are designed to stabilize incomes and consumption and business spending as people are hit by recession.

They are triggered automatically without additional government action, more or less preventing the spiraling down of the economy due to reduction in aggregate demand.

However, as budget are fed by tax and drained by transfer payments, the working of automatic stabilizers in recession would worsen budget deficits.