Question

Which of the following correctly describes how an automatic stabilizer will function?

a)During an economic expansion
b)income rise and a progressive income tax claims a larger portion of income
c)slowing growth in disposable income

Answer 1

An automatic stabilizer is a fiscal policy tool that helps keep the economy stable by offsetting fluctuations in aggregate demand without the need for discretionary government action. During an economic expansion, automatic stabilizers work by reducing government spending and increasing tax rates. This leads to a slowing growth in disposable income.

Step-by-step explanation:

An automatic stabilizer is a fiscal policy tool that helps keep the economy stable by offsetting fluctuations in aggregate demand without the need for discretionary government action. It functions by adjusting tax rates and government spending in response to changes in economic conditions.

During an economic expansion, automatic stabilizers work by reducing government spending and increasing tax rates. As income rises and a progressive income tax claims a larger portion of income, this leads to a slowing growth in disposable income.

For example, during an economic expansion, individuals tend to earn more income. As a result, their tax obligations increase, which reduces their disposable income. Additionally, government spending in areas like welfare and unemployment benefits may decrease due to fewer individuals qualifying for these programs.