Which of the following best describes the role of automatic stabilizers in the economy?

• A. They refer to monetary policy tools used by central banks to control inflation.
• B. They help reduce fluctuations in economic activity by automatically increasing government spending or decreasing taxes during recessions, and doing the opposite during expansions.
• C. They are government policies that require legislative approval before being implemented to stabilize the economy.
• D. They are mechanisms that automatically increase interest rates during periods of high unemployment.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand what automatic stabilizers are in macroeconomics. These are economic policies and programs designed to offset fluctuations in a nation's economic activity without direct intervention by policymakers.
2. Step 2: Recognize that automatic stabilizers work by adjusting government spending and taxes automatically in response to changes in economic conditions, such as recessions or expansions.
3. Step 3: During a recession, automatic stabilizers increase government spending (e.g., unemployment benefits) and decrease tax revenues (due to lower incomes), which helps support aggregate demand and reduce the severity of the downturn.
4. Step 4: Conversely, during economic expansions, automatic stabilizers reduce government spending and increase tax revenues, which helps cool down the economy and prevent overheating.
5. Step 5: Differentiate automatic stabilizers from discretionary fiscal policy and monetary policy, noting that automatic stabilizers do not require new legislation or active decisions by policymakers to take effect.