7. Automatic stabilizers Aa Aa Which of the following are examples of automatic

Question

7. Automatic stabilizers Aa Aa Which of the following are examples of automatic stabilizers? Check all that apply. In the mid-1990s, Parliament passed expenditure cuts designed to reduce the deficit. As poverty rates rise during a recession, more people qualify for welfare, and welfare payments increase. In response to the 2008 recession, Parliament approved billions of dollars of additional spending on public infrastructure projects. As people earn higher incomes during an expansion, the progressive tax system requires them to pay higher average tax rates.

Explanation / Answer

Automatic stabilizers include taxes (individual and business tax) and transfer payments, which intend to stabilize an economic shock. Therefore the following are automatic stabilizers:

- As poverty rates rise during recession, welfare payments increase (type of transfer payments)

- As people earn higher income during expansion, progressive tax system requires them to pay higher average tax rates.

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