How do automatic stabilizers work to mitigate fluctuations in the level of economic activity?
What will be an ideal response?
When income is high, the government collects more taxes and pays out less in transfer payments. Since the increase in taxes takes funds out of the hands of consumers, consumer spending is reduced. When output is low, as it is in a recession, the government collects less taxes and pays out more in transfer payments, putting funds into the hands of consumers and thereby increasing consumer spending. By increasing consumer spending in bad times and decreasing it in good times, the automatic stabilizers buffer fluctuations in spending.
You might also like to view...
Steve is in a consumer equilibrium. Then, the price of steak increases from $6 a pound to $8 a pound. Steve decreases the number of pounds of steaks he buys each week ________
A) and decreases his total utility B) only if his income also decreases C) so that the marginal utility per dollar spent on steaks is the same as it was when the price was $6 a pound D) so that both his total utility and his marginal utility from steak fall
The long-run market supply curve for an increasing-cost, perfectly competitive industry
a. is horizontal b. slopes upward c. is the portion of its marginal cost curve above the minimum point on its average variable cost curve d. is the portion of its marginal cost curve above the minimum point on its average total cost curve e. is vertical
The development of a low-cost synthetic fuel is expected to cause a decrease in the price of oil
a. True b. False Indicate whether the statement is true or false
If the price elasticity of demand is -0.8 and the firm increases price, revenue will
a. Increase b. Decrease c. Stay constant d. become zero, they would lose all their customers