The automatic stabilizers (LO3) a) moderate the extremes of the business cycle b) make the business cycle more extreme c) have virtually no effect on the business cycle

Automatic stabilizers refer to certain economic policies and programs implemented by governments, such as taxes and unemployment benefits, which automatically respond to changes in the business cycle and help moderate its extremities. By doing this, they play a significant role in stabilizing the economy and reducing fluctuations that can cause significant disruptions.

a) Moderate the extremes of the business cycle This statement is correct. Automatic stabilizers help to smooth out economic fluctuations by automatically adjusting tax revenues and government expenditures in response to changes in the business cycle. When the economy is in an expansion phase, automatic stabilizers collect more tax revenues and provide less support through transfer payments. This helps to cool down the economy and reduce inflation. On the other hand, during a recession, these stabilizers collect less tax revenue and increase transfer payments to support individuals and businesses. This provides stimulus to the economy and helps to restore growth.

b) Make the business cycle more extreme This statement is false. The main purpose of automatic stabilizers is to provide cushion against the extremities of the business cycle. As mentioned above, these stabilizers respond automatically to changes in the economy, helping to promote stability and reduce the severity of economic fluctuations. By doing this, they prevent the economy from experiencing significant disruptions and instabilities.

c) Have virtually no effect on the business cycle This statement is also false. Automatic stabilizers play an essential role in supporting macroeconomic stability during different phases of the business cycle. By automatically adjusting tax revenues and government spending in response to economic fluctuations, these stabilizers can help to balance the economy in both the expansion and contraction phases. They maintain a level of stability, ensuring that the overall impact on the economy is minimal and moderating the severity of any disruptions that could arise from these fluctuations. In conclusion, the correct answer is Statement a), as automatic stabilizers moderate the extremes of the business cycle by providing automatic support to both the expansion and contraction phases, thereby promoting overall economic stability.