Question

If the economy expands, automatic stabilizers will cause:

A) tax receipts to fall and government spending to rise.
B) tax receipts to rise and government spending to fall.
C) both tax receipts and government spending to rise.
D) both tax receipts and government spending to fall.

Answer 1

When the economy expands, automatic stabilizers increase tax receipts and decrease government spending, reflecting a contractionary fiscal policy.

Step-by-step explanation:

If the economy expands, automatic stabilizers in fiscal policy will cause tax receipts to rise and government spending to fall. This is because, in a stronger economy, individuals and businesses earn more, which translates to higher tax revenues from personal income and corporate profits.

Simultaneously, with a lower unemployment rate and fewer layoffs, there is a reduced need for government spending on social safety net programs such as unemployment benefits, welfare, Medicaid, and others. This situation embodies a contractionary fiscal policy, which occurs automatically without discretionary changes in tax laws or spending mandates.