Question

For each of the following, explain whether it is an example of an automatic stabilizer:
a. Unemployment benefits increase during a recession.
b. The government attempts to slow inflation by reducing military spending.
c. The government cuts income taxes to boost the economy.
d. Many taxpayers fall out of the top tax bracket and keep a larger share of their income as the economy worsens.

Answer 1

a. Unemployment benefits increase during a recession.
Yes, “Automatic stabilizers are elements of the budget that tend to increase revenues during an expansion (such as taxes on incomes and profits) and increase expenditures during a recession (such as spending for unemployment compensation and antipoverty programs).”
b. The government attempts to slow inflation by reducing military spending.
Yes, because the government is battling inflation, it is creating some sort of economic stabilization. Unless government passes a new legislation to reduce military spending, then yes, it is an automatic stabilizer.
c. The government cuts income taxes to boost the economy.
No, the government is boosting the economy; however, there is no countering any activity that threatens the national economy.
d. Many taxpayers fall out of the top tax bracket and keep a larger share of their income as the economy worsens.
No, this will in no way help or stabilize the economy, only make it worse, because people are keeping their income.


Feel free to respond.

Answer 2

b) I don't see how reducing military spending is an automatic stabilizer since if the economy grows or shrinks there won't be automatic changes.

d)When the economy worsens then people will keep more of their income so the revenues of the government will be lower, when the economy is booming then the opposite happens; this is an automatic stabilizer.