Automatic stabilizers operate automatically during economic fluctuations; which pair is a classic example?

Automatic stabilizers operate automatically during economic fluctuations; which pair is a classic example?

• A. Tariffs and quotas.
• B. Unemployment insurance and progressive income taxes.
• C. Discretionary tax credits for corporations.
• D. Public works programs.

Answer: (B)

Automatic stabilizers are fiscal features that automatically counteract fluctuations in the economy without new policy action. Unemployment insurance fits this idea because when unemployment rises, more people receive benefits, which automatically increases government transfers and supports consumer spending. Progressive income taxes also play this role: as incomes fall in a downturn, tax revenues drop automatically, leaving households with more disposable income than they would have under a fixed tax system; during a boom, higher incomes push tax collections up, tempering spending. Together, they smooth out swings in aggregate demand and help stabilize output and employment. Tariffs and quotas are policy tools tied to trade, not automatic responses to the business cycle. Discretionary tax credits and public works programs require new legislative action, so they don’t automatically adjust to economic conditions.

Automatic stabilizers are fiscal features that automatically counteract fluctuations in the economy without new policy action. Unemployment insurance fits this idea because when unemployment rises, more people receive benefits, which automatically increases government transfers and supports consumer spending. Progressive income taxes also play this role: as incomes fall in a downturn, tax revenues drop automatically, leaving households with more disposable income than they would have under a fixed tax system; during a boom, higher incomes push tax collections up, tempering spending. Together, they smooth out swings in aggregate demand and help stabilize output and employment.

Tariffs and quotas are policy tools tied to trade, not automatic responses to the business cycle. Discretionary tax credits and public works programs require new legislative action, so they don’t automatically adjust to economic conditions.