The Federal Reserve decides to reduce the quantity of money in circulation in an
ID: 1200533 • Letter: T
Question
The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation. Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended to head off economic crises. Determine whether each of the following is an example of an automatic fiscal stabilizer. A federal agency must extend loans to businesses whenever an economic downturn begins. As the economy heats up, the resulting increase in equilibrium real GDP per year immediately results in higher income tax payments, which dampen consumption spending somewhat. As the economy starts to recover from a severe recession and more people go back to work, government-funded unemployment compensation payments begin to decline. To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on government programs. Consider the diagram below, in which the current short-run equilibrium is at point.A, and answer the questions that follow.Explanation / Answer
options B and C are the examples of automatic fiscal stabilizers. because government don't need to change its plicies in different times. stabilizers responds automatically and immediately to stabilize the economy. as GDP increases TAX revenues increases automatically to put a bound on consumption to some extent and thus helps in stabilizing.
govt. unemployment compansation schemes also responds automatically. whenever there is boom (high employment)govt. expenditure reduces on unemployment and thus helps in stabilizing the economy.
on the other hand using special powers by president is not automatic stabilization , actions are neede for that.
and extention of loan in recession is also not automatic as federal agency needs to keep an eye on economic conditions to grant a loan.
so options B and C is right answer
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