Question

One advantage of automatic stabilizers of discretionary fiscal policy is that automatic stabilizers...

a) Increase budget deficits
b) React immediately to economic changes
c) Require government intervention
d) Amplify inflationary pressures

Answer 1

Automatic stabilizers in discretionary fiscal policy react immediately to economic changes without requiring government intervention. They act as shock absorbers, reducing the impact of economic bumps by offsetting part of the shifts in aggregate demand.

Step-by-step explanation:

Automatic stabilizers in discretionary fiscal policy have the advantage of reacting immediately to economic changes. When lower wages result in a decrease in taxes withheld from paychecks, or when higher unemployment leads to increased government spending on benefits, the automatic stabilizers kick in without requiring government intervention. These stabilizers help offset part of the shifts in aggregate demand, acting like shock absorbers by reducing the impact of economic bumps. However, they do not eliminate all or most of these shifts, historically offsetting only about 10% of the initial movement in the level of output.