Question : Automatic stabilizers refer to:
Option 1: Government policies that automatically stabilize the economy during a recession
Option 2: Business practices that automatically stabilize the economy during a recession
Option 3: Changes in interest rates that automatically stabilize the economy during a recession
Option 4: Changes in tax rates that automatically stabilize the economy during a recession
Correct Answer: Changes in tax rates that automatically stabilize the economy during a recession
Solution : The correct answer is (d) Changes in tax rates that automatically stabilize the economy during a recession
Automatic stabilizers are features of a country's fiscal policy that are built into the tax and transfer systems. They work to automatically stabilize the economy during economic downturns, such as recessions, without requiring explicit government intervention or discretionary decisions.
During a recession, automatic stabilizers operate in such a way that they help stimulate economic activity and support individuals and businesses. One key mechanism is through changes in tax rates. During a recession, tax revenues tend to decrease due to lower income levels and reduced economic activity. This automatically results in a decrease in tax collections, providing some relief to households and businesses.
By reducing tax burdens during a recession, automatic stabilizers aim to bolster disposable income, increase consumer spending, and stimulate economic growth. This helps to stabilize the economy by offsetting the contractionary forces that typically occur during recessions.
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