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Chapter 30: Q.32 (page 742)

Why do automatic stabilizers function “automatically?”

Short Answer

Expert verified

Automatic stabilisers work without the need for government intervention since they bring about adjustments in the economy.

Step by step solution

01

Concept of automatic stabilizers.

Automatic stabilizers are tax and spending rules that lower the pace of decline in consumer spending when the economy slows and constrain aggregate demand whenever the economy accelerates.

02

Explanation of solution.

Automatic stabilisers were created as a result of previous legislation. They function as no additional laws are passed after they have been put in place. Unemployment insurance, for example, is a self-correcting mechanism. When unemployment rises, eligible unemployed workers receive benefits even though the state and the presidency do nothing.

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Most popular questions from this chapter

A government starts off with a total debt of \(3.5 billion. In year one, the government runs a deficit of \)400 million. In year two, the government runs a deficit of \(1 billion. In year three, the government runs a surplus of \)200 million. What is the total debt of the government at the end of year three?

What are the main categories of U.S. federal government spending?

Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall? Explain your answer. Is it possible for a nation to run budget surpluses and still have its debt/GDP ratio rise? Explain your answer.

What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?

When governments run budget deficits, how do they make up the differences between tax revenue and spending?
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