Which statement about automatic stabilizers is true?

Which statement about automatic stabilizers is true?

• A. Require new legislation to take effect
• B. Adjust automatically with the business cycle
• C. Are set by the central bank
• D. Aim only at long-run growth.

Answer: (B)

Automatic stabilizers are built-in features of the tax and transfer system that respond to changes in economic conditions without new legislation. When the economy slows, tax receipts typically fall and unemployment benefits rise, which puts more money into households and helps support demand. When the economy speeds up, taxes rise and transfers fall, which helps cool demand. This automatic adjustment means they move with the business cycle on their own, rather than needing new laws to take effect. They aren’t tools of the central bank, which handles monetary policy, and their main purpose is to smooth short-run fluctuations rather than solely promote long-run growth.

Automatic stabilizers are built-in features of the tax and transfer system that respond to changes in economic conditions without new legislation. When the economy slows, tax receipts typically fall and unemployment benefits rise, which puts more money into households and helps support demand. When the economy speeds up, taxes rise and transfers fall, which helps cool demand. This automatic adjustment means they move with the business cycle on their own, rather than needing new laws to take effect. They aren’t tools of the central bank, which handles monetary policy, and their main purpose is to smooth short-run fluctuations rather than solely promote long-run growth.