When the economy of a country enters into a depression, existing automatic stabi

Question

When the economy of a country enters into a depression, existing automatic stabilizers will cause:

Question 25 options:

tax receipts to fall and government spending to rise.

tax receipts to rise and government spending to fall.

both tax receipts and government spending to rise.

both tax receipts and government spending to fall.

Question 26 options:

AD0 to AD2 but then back to AD1 if crowding out occurs.

AD0 to AD2 but then out to AD3 if crowding out occurs.

AD0 to AD2 whether or not crowding out occurs.

AD2 to AD1 and then from AD1 to AD0 if crowding out occurs.

At the macro level, what will possibly reduce cyclical unemployment?

Question 27 options:

Workers move to the non-tradable sector.

The Fed sells bonds.

The economy expands.

Okun's law changes.

tax receipts to fall and government spending to rise.

tax receipts to rise and government spending to fall.

both tax receipts and government spending to rise.

both tax receipts and government spending to fall.

Explanation / Answer

In macroeconomics, automatic stabilisers are features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to dampen fluctuations in real GDP.

The size of the government budget deficit tends to increase when a country enters a recession, which tends to keep national income higher by maintaining aggregate demand. There may also be a multiplier effect. This effect happens automatically depending on GDP and household income, without any explicit policy action by the government, and acts to reduce the severity of recessions.

Thus during an economic slump

Tax reciepts fall and government spending rise.This happens in order to maintain the level of aggregate demand in the economy.

2)An expansionary fiscal policy shifts the AD curve rightwards.However crowding out that occurs due to rise in interest rates would reduce investment spending and shift AD curve leftwards .

Thus an expansionary fiscal policy shifts AD curve from AD0 to AD2 but then back to AD1 crowding out occurs.

Cyclical unemployment is the unemployment that occurs due to business cyle.Thus its very low when economy is at its peak and very high if economy is at slump.Thus the best way to do away with this kind of unemployment is

THE ECONOMY EXPANDS

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