Which of the following is an example of an automatic stabilizer? A. The Federal Reserve’s discount rate.B. Discretionary fiscal policy that must be determined by Congress and the president.C. Changes in the economy, like rising savings, that reduce inflation caused by economic activity.D. Supply-side policies that Congress designs to stimulate the economy.
C. Changes in the economy, like rising savings, that reduce inflation caused by economic activity.
The correct answer is C: Changes in the economy, like rising savings, that reduce inflation caused by economic activity are examples of automatic stabilizers. Automatic stabilizers are economic policies and programs that are designed to offset fluctuations in the business cycle without direct intervention by policymakers. These stabilizers work by changing government spending and taxation in response to changes in economic activity.
For example, as incomes rise, individuals save more money, which leads to a decrease in consumer spending and inflationary pressures. This decrease in economic activity leads to lower tax revenues and increased spending on social welfare programs, such as unemployment insurance and food stamps. These programs help to stabilize the economy by providing a safety net for individuals during periods of economic downturn.
On the other hand, discretionary fiscal policy (option B) refers to government policies that are deliberately enacted to influence economic output and other policies, such as supply-side policies (option D) are designed to stimulate production, but are not considered automatic stabilizers. The Federal Reserve’s discount rate (option A) is a monetary policy tool, which is not considered an automatic stabilizer.
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