Gross domestic product (GDP) in Marthland is decreasing, plunging Marthaland into a recession.

How will the response of automatic stabilizers to decreasing GDP in Marthaland affect the economy of Marthaland?

Choose 1 answer:

A Tax revenues will decrease without governmental action, which will keep consumption and output from falling further.
(B) The government of Marthaland will respond by implementing expansionary fiscal policy, such as a new infrastructure project.
(c) Transfer payments will decrease automatically, decreasing spending and output.
(D) The government will respond by passing a one-time tax cut to stimulate the economy.
(E) The government will implement contractionary fiscal policy, such as decreasing government spending.

Question

Gross domestic product (GDP) in Marthland is decreasing, plunging Marthaland into a recession.

How will the response of automatic stabilizers to decreasing GDP in Marthaland affect the economy of Marthaland?

Choose 1 answer:

A Tax revenues will decrease without governmental action, which will keep consumption and output from falling further.
(B) The government of Marthaland will respond by implementing expansionary fiscal policy, such as a new infrastructure project.
(c) Transfer payments will decrease automatically, decreasing spending and output.
(D) The government will respond by passing a one-time tax cut to stimulate the economy.
(E) The government will implement contractionary fiscal policy, such as decreasing government spending.

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ Understand the concept of automatic stabilizers in the context of an economy experiencing a recession. Automatic stabilizers are economic policies and programs designed to offset fluctuations in a nation's economic activity without additional government action. ‖ ‖ step 2 ⋮ Identify the effects of decreasing GDP on tax revenues and transfer payments. During a recession, as GDP decreases, incomes fall, leading to lower tax revenues. Simultaneously, more people qualify for government transfer payments like unemployment benefits, which automatically increase. ‖ ‖ step 3 ⋮ Analyze the given options in the context of automatic stabilizers. Automatic stabilizers work without new government action, so options involving active government responses (B and D) are not examples of automatic stabilizers. Option (E) is also an active response and not automatic. Option (C) incorrectly states that transfer payments decrease, which is the opposite of what happens. ‖ ‖ step 4 ⋮ Conclude with the correct answer based on the function of automatic stabilizers. The correct answer is the one that describes the automatic decrease in tax revenues that helps to stabilize the economy by leaving more money in the hands of consumers, thereby preventing further decreases in consumption and output. ‖ ∻Answer∻ ***A*** ∻Key Concept∻ ⚹Automatic Stabilizers⚹ ∻Explanation∻ ⚹Automatic stabilizers help to mitigate the effects of economic fluctuations by automatically adjusting tax revenues and transfer payments without the need for new government action.⚹◊What impact does a decrease in GDP have on automatic stabilizers in the economy of Marthaland⍭ Generate me a similar question◊

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