Q. 8 Determine whether each of the fo... [FREE SOLUTION]

Chapter 13: Q. 8 (page 296)

Determine whether each of the following is an example of an automatic fiscal stabilizer.
a. A federal agency must extend loans to businesses whenever an economic downturn begins.
b. As the economy heats up, the resulting increase in equilibrium real GDP per year immediately results in higher income tax payments, which dampen consumption spending somewhat.
c. As the economy starts to recover from a severe recession and more people go back to work, government-funded unemployment compensation payments begin to decline.
d. To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on govemment programs.

Short Answer

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a) As a result, this is not an automatic action made by the government, but rather a voluntary action taken by the government by foreseeing the future.

b) As a result, the issue has been corrected without the need for government intervention.

c) As a result, the situation has been stabilized without the need for government intervention.

d) As a result, rather than having an automatic stabilizer, the government takes deliberate intervention.

Step by step solution

Introduction

Given is the statements that state about the downturns of business and GDP

The objective is to determine the situations are examples of automatic fiscal stabilizer

Explanation (part a)

(a)

This is not an example of an automatic fiscal stabilizer because the government agency secured loans to businesses before the economy suffered a slump.

As a result, this is not an automatic action made by the government, but rather a voluntary action taken by the government by foreseeing the future.

Explanation (part b)

(b)

This circumstance is an example of an automatic fiscal stabilizer because it is obvious that higher income tax payments have resulted in an automatic change in equilibrium real GDP.

As a result, the issue has been corrected without the need for government intervention.

Explanation (part c)

(c)

This is an example of an automatic fiscal stabilizer because the economy has begun to recover from the crisis, resulting in lower government-funded unemployment compensation payments.

As a result, the situation has been stabilized without the need for government intervention.

(part d)

(d) Because the president employs unique powers to allow the impoundment of emergency money, this circumstance is not an example of an automatic fiscal stabilizer.

As a result, rather than having an automatic stabilizer, the government takes deliberate intervention.