Final answer:
During an economic expansion, automatic stabilizers reduce a budget deficit or increase a surplus by raising tax revenues and lowering government spending on welfare without active fiscal intervention, which helps to smooth out economic cycles and reduce the severity of economic fluctuations. Hence, the correct answer is option (C).
Step-by-step explanation:
During an economic expansion, automatic stabilizers serve to modify the impact of economic fluctuations on the nation's budget. As the economy expands, incomes rise, leading to higher tax revenues without increasing tax rates, and at the same time, government spending on welfare programs such as unemployment benefits decreases. This combination of increased tax revenues and decreased government spending results in reducing a budget deficit or increasing a budget surplus.
Automatic stabilizers work in the opposite direction during an economic downturn when they act to increase the deficit or reduce the surplus due to lower tax revenues and higher welfare spending. Without automatic stabilizers, fiscal policy would have to rely solely on discretionary changes, which can be slow and politically challenging to implement. Automatic stabilizers thus play a crucial role in smoothing out economic cycles without the need for active intervention.