Which of the following policies represents an automatic stabilizer with respect to fiscal policy?

• A. Unemployment insurance payments
• B. A temporary reduction in corporate tax rates
• C. A government decision to increase defense spending
• D. A one-time infrastructure spending bill

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what an automatic stabilizer is in fiscal policy. Automatic stabilizers are government programs or policies that automatically adjust to economic conditions without the need for new legislative action, helping to stabilize the economy during fluctuations.
2. Step 2: Identify the characteristics of automatic stabilizers. They typically increase government spending or decrease taxes automatically when the economy slows down, and do the opposite when the economy improves, thus smoothing out economic cycles.
3. Step 3: Analyze each option to see if it fits the definition of an automatic stabilizer. For example, unemployment insurance payments automatically increase when more people lose jobs during a recession, providing income support without new government decisions.
4. Step 4: Contrast this with other options like a temporary reduction in corporate tax rates, a government decision to increase defense spending, or a one-time infrastructure spending bill, which require active government decisions and are not automatic.
5. Step 5: Conclude that the policy which automatically adjusts with economic conditions without new legislation, such as unemployment insurance payments, represents an automatic stabilizer.