Question

government spending increases to help low-income student afford college. which of the following is likely to result? a. automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand. b. automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand. c. automatic stabilizers will increase the expansionary impact of the increase in aggregate demand. d. automatic stabilizers will decrease the contractionary impact of the increase in aggregate demand. selected:e. automatic stabilizers will have no impact on the increase in government spending and aggregate demand.

Answer 1

Automatic stabilizers will likely decrease the expansionary impact of increased government spending aimed at helping low-income students afford college, by marginally reducing the increase in aggregate demand through mechanisms like higher tax outflows as the economy improves.

Step-by-step explanation:

When the government increases spending to help low-income students afford college, the automatic stabilizers in the economy will interact with this policy. Automatic stabilizers are tax and spending rules that help to manage the economy by slowing down decreases or restraining increases in aggregate demand without new legislation. If the government increases spending, it is engaging in expansionary fiscal policy, which is designed to increase aggregate demand and stimulate the economy.

In this context, automatic stabilizers may partially offset the expansionary impact of the increased government spending. For instance, as the economy strengthens due to increased spending, higher incomes may lead to higher taxes being paid, which could have a contractionary effect, thereby reducing the full impact of the increase in aggregate demand by a small margin.

Therefore, the correct option which states that automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand would be most accurate.