Which item is not an automatic stabilizer?

Which item is not an automatic stabilizer?

• A. Progressive income taxes
• B. Unemployment insurance
• C. Automatic government spending rules
• D. Tax credits enacted by Congress

Answer: (D)

Automatic stabilizers are built-in fiscal features that smooth out the business cycle without new policy action. When the economy slows and incomes fall, a progressive income tax system collects less money automatically, and unemployment insurance payouts rise, putting money into households and supporting demand. Those automatic responses happen without Congress taking steps each time, so they are classic automatic stabilizers. Automatic government spending rules can also adjust spending automatically based on economic conditions, reinforcing this dampening effect. Tax credits enacted by Congress, on the other hand, require new legislation to take effect, so they do not respond automatically to economic conditions and are not automatic stabilizers.

Automatic stabilizers are built-in fiscal features that smooth out the business cycle without new policy action. When the economy slows and incomes fall, a progressive income tax system collects less money automatically, and unemployment insurance payouts rise, putting money into households and supporting demand. Those automatic responses happen without Congress taking steps each time, so they are classic automatic stabilizers. Automatic government spending rules can also adjust spending automatically based on economic conditions, reinforcing this dampening effect. Tax credits enacted by Congress, on the other hand, require new legislation to take effect, so they do not respond automatically to economic conditions and are not automatic stabilizers.