Which of the following is an example of a built-in stabilizer in the economy?

• A. Progressive income tax system
• B. Price controls on essential goods
• C. Government investment in infrastructure
• D. Central bank open market operations

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a built-in stabilizer is. Built-in stabilizers are automatic economic policies and programs that counterbalance fluctuations in a nation's economic activity without additional government action. They work to reduce the severity of economic cycles by automatically increasing spending or decreasing taxes during downturns, and doing the opposite during booms.
2. Step 2: Analyze each option to see if it fits the definition of a built-in stabilizer. Price controls on essential goods are government-imposed limits on prices, which are not automatic and require active intervention, so they are not built-in stabilizers.
3. Step 3: Consider government investment in infrastructure. This is a discretionary fiscal policy action, meaning it requires deliberate government decisions and is not automatic, so it is not a built-in stabilizer.
4. Step 4: Look at central bank open market operations. These are monetary policy tools used actively by the central bank to influence the economy, not automatic mechanisms, so they are not built-in stabilizers.
5. Step 5: Evaluate the progressive income tax system. This system automatically adjusts tax burdens based on income levels, collecting more taxes when incomes rise and less when incomes fall, thus stabilizing disposable income and consumption without new government action. This fits the definition of a built-in stabilizer.