Question

During an economic contraction, automatic stabilizers:

A. reduce both budget surpluses and deficits.
B. reduce a budget surplus or increase a deficit.
C. reduce a budget deficit or increase a surplus.
D. increase both budget surpluses and deficits.

Answer 1

Automatic stabilizers reduce a budget surplus or increase a deficit during economic contractions, as they lead to higher government spending and lower tax revenues. Correct answer is B. reduce a budget surplus or increase a deficit

Step-by-step explanation:

During an economic contraction, automatic stabilizers function in such a way that they reduce a budget surplus or increase a budget deficit. This is because during economic downturns, automated mechanisms like reduced taxation and increased welfare benefits lead to less revenue coming into the government and more spending going out. Hence, the correct answer to the student's question is B. reduce a budget surplus or increase a deficit.

Economic recessions lead to less tax-generating economic activity due to higher rates of unemployment and business setbacks. This triggers automatic stabilizers that result in higher government spending, such as increased unemployment insurance payments, and lower tax revenues as incomes fall. Throughout history, these automatic stabilizers have played a crucial role in providing a counter-cyclical economic influence, helping to mitigate the severity of economic downturns. Therefore, Correct answer is B. reduce a budget surplus or increase a deficit.