Question

A major advantage of the automatic stabilizers is that they ( \(\mathrm{O3})\) a) simultaneously stabilize the economy and tend to reduce the size of the public debt b) guarantee that the federal budget will be balanced over the course of the business cycle c) automatically produce surpluses during recessions and deficits during inflations d) require no legislative action by Congress to be made effective

Short answer

The correct answer is: Option D) Require no legislative action by Congress to be made effective. Automatic stabilizers automatically respond to economic fluctuations and help stabilize the economy without the need for legislative action.

Step-by-step solution

Automatic stabilizers are government policies and programs that are designed to offset fluctuations in a nation's economic activity without direct intervention by lawmakers. These can be in the form of taxes, transfers, and public spending. Their purpose is to help stabilize economic cycles by automatically increasing government spending during a recession and decreasing it during a period of inflation. #Step 2: Evaluating Option A#

a) Simultaneously stabilize the economy and tend to reduce the size of the public debt. Automatic stabilizers do help in stabilizing the economy by providing a counterbalance to economic fluctuations. However, they do not necessarily reduce the size of public debt. In fact, during recessions, government spending usually increases, which can increase public debt. Therefore, this option is partially correct. #Step 3: Evaluating Option B#

b) Guarantee that the federal budget will be balanced over the course of the business cycle. Automatic stabilizers do not guarantee a balanced federal budget over the course of the business cycle. Their purpose is to stabilize the economy, not to balance the budget. Therefore, this option is incorrect. #Step 4: Evaluating Option C#

c) Automatically produce surpluses during recessions and deficits during inflations. This option is incorrect because it's the other way around - automatic stabilizers usually lead to deficits during recessions (as government spending increases to boost the economy) and surpluses during inflations (as government spending decreases to prevent overheating). #Step 5: Evaluating Option D#

d) Require no legislative action by Congress to be made effective. This option is correct. Automatic stabilizers are designed to work without the need for legislative action or intervention by lawmakers. They automatically respond to economic fluctuations, providing a counterbalance that helps stabilize the economy. #Step 6: Choose the correct option#

Based on the evaluation of the options, the correct answer is: Option D) Require no legislative action by Congress to be made effective.

Key concepts

Economic Fluctuations

Economic fluctuations, also known as business cycles, represent the ups and downs in economic activity over time. They are characterized by periods of expansion or growth and contraction or decline. During expansions, employment rates are high, markets are bullish, and GDP grows. Conversely, during contractions, the economy experiences layoffs, bearish markets, and falling GDP.

Automatic stabilizers play a key role in smoothing these fluctuations without the need for new legislation. Examples include the progressive income tax system and unemployment benefits. As the economy slows down, these stabilizers kick in to support income and demand, helping to dampen the severity of a downturn. Conversely, they'll retract support during expansion periods to avoid overheating the economy.

Government Spending

Government spending includes all expenditures by government bodies on goods, services, and public projects. It's a powerful tool for influencing a nation's economy. During periods of recession, increased government spending can inject money into the economy, stimulating demand and employment. As a component of fiscal policy, such spending can be discretionary or nondiscretionary. Automatic stabilizers fall into the latter category—these mechanisms adjust government spending according to economic performance, adding a layer of resilience to the economy by countering cyclical changes without the need for direct political intervention.

Public Debt

Public debt, commonly referred to as national or government debt, is the total amount owed by the federal government, acquired through the issuance of government bonds and other means. Public debt increases when governments spend more than they collect in revenue, a situation that often occurs during economic downturns when automatic stabilizers increase spending to support the economy.

While it's a common misconception that automatic stabilizers reduce public debt, in reality, they can lead to an increase in debt during economic contractions. However, they also promote recovery, which can lead to increased revenues that may later help reduce the debt.

Fiscal Policy

Fiscal policy is the use of government revenue collection and expenditure to influence the economy. This policy is a primary tool for governments to manage economic fluctuations and guide the economy towards desired objectives such as price stability, full employment, and sustainable growth rates.

Within fiscal policy, automatic stabilizers function passively to mitigate the impact of economic fluctuations. Unlike active fiscal measures such as tax cuts or stimulus packages that require legislative action, automatic stabilizers are built-in to the system. They deliver a preemptive response to economic changes, providing instant countermeasures like increased benefit payments during a slowdown, without the need for policymakers to act.