An automatic stabilizer (non discretionary fiscal policy) refers to the fact tha

Question

An automatic stabilizer (non discretionary fiscal policy) refers to the fact that

A congess deliberately changes govt. Spending and taxes to run a deficit when the economy is above full employment and to run a surplus when the economy is below full employment
B congress deliberately changes govt spending and taxes to run a surplus when the economy is above full employment and to runa deduct when economy Is below full employment
C with a given tax structure and govt spending policies an increase in income will produce a surplus while a decrease in income produces a deficit.
D with a given tax structure and govt spending policies a decrease in income will produce a surplus while an increase in income produces a deficit
E the budget is balanced annually if congress would not purposefully change government spending and taxes.

Explanation / Answer

C-> An automatic stabilizer means that budget will be in surplus during boom(Above full employment) and deficit(below full employment). Conceptually, you can even get this through the process of elimination. Automatic stabilizers require no intervention from the congress. Therefore, reject a, b and e. D causes a deficit in boom time and surplus in recession. An automatic stabilizer is meant to dampen the effects of excess growth and bring the economy back from slow down a recession/depression in order to bring it back on track.

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