Which of the following is an example of an automatic stabilizer (automatic fiscal policy)?

• A. The central bank lowering its policy interest rate in response to falling inflation
• B. A new infrastructure spending bill enacted to reduce unemployment
• C. A one-time discretionary stimulus check passed by Congress to increase aggregate demand
• D. Unemployment insurance payments that rise automatically when the economy enters a recession

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of automatic stabilizers in fiscal policy. Automatic stabilizers are government programs that automatically increase spending or decrease taxes when the economy slows down, without the need for new legislation.
2. Step 2: Identify the key characteristic of automatic stabilizers: they operate without discretionary action, meaning they respond automatically to changes in economic conditions, such as rising unemployment during a recession.
3. Step 3: Analyze each option to see if it fits this characteristic. For example, a central bank lowering interest rates is a monetary policy action, not fiscal, and it requires a decision by the central bank.
4. Step 4: Recognize that new infrastructure spending or a one-time stimulus check are discretionary fiscal policies because they require new legislation or decisions by policymakers.
5. Step 5: Conclude that unemployment insurance payments that increase automatically during a recession are a classic example of an automatic stabilizer because they provide support without new government action, helping to stabilize aggregate demand.