Automatic stabilizers lead to changes in taxation and government spending as eco

Question

Automatic stabilizers lead to changes in taxation and government spending as economic output varies. How do automatic stabilizers impact tax revenue and government spending during a recession Suppose that the government is required to balance the budget. Which of the following is an appropriate discretionary appreach during a recession and what effect would it have to the economy Cut taxes to encourage consumer spending which would minimize the effects of the recession. Increase government spending to stimulate the economy causing an increase in overall aggregate demand. Cut government spending to equal tax revenue possibly magnifying the effects of a recession. Invest in public infrastructure that promotes employment and stimulates the economy.

Explanation / Answer

Tax revenue decrease and government spending increase during a recession.

Explanation: During recessions, government spending automatically increases, which raises aggregate demand and offsets decreases in consumer demand. Government revenue automatically decreases.

2. Cut government spending to equal tax revenue possibly magnifying the effect of a recession.

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