Question

The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. The current tax system acts as an automatic stabilizer.

Which of the following are examples of automatic stabilizers? Check all that apply.

a. Corporate income taxes
b. Unemployment insurance benefits
c. Personal income taxes

Answer 1

These three elements are automatic stabilizers:

a. Corporate income taxes

b. Unemployment insurance benefits

c. Personal income taxes

Step-by-step explanation:

Automatic stabilizers are features of fiscal policy that automatically dampen the effects of a recession on government revenue.

This is because these features adjust on a recession.

Corporate taxes are reduced on a recession because they are based on corporate profits, and corporate profits fall very fast during economic recession.

Unemployment insurance benefits increase during economic recessions because more people are laid off when the economy slows down.

Personal income tax income also decreases because people earn less during recessions.