Multiple Choice
Which of the following best describes a monetary policy tool?
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1. Introduction to Macroeconomics
Introduction to Economics
Multiple Choice
A major advantage of the built-in or automatic stabilizers is that they:
A
always eliminate unemployment during recessions
B
require frequent legislative changes to be effective
C
help reduce fluctuations in the economy without the need for new government action
D
increase the volatility of government spending
Verified step by step guidance1
Understand what automatic stabilizers are: these are economic policies and programs, such as unemployment insurance and progressive taxes, that automatically adjust to economic conditions without new government intervention.
Recognize the role of automatic stabilizers: they work to moderate the business cycle by increasing government spending or decreasing taxes during recessions, and doing the opposite during expansions.
Analyze each option given in the problem: determine if automatic stabilizers always eliminate unemployment (they do not), if they require frequent legislative changes (they do not), if they help reduce economic fluctuations without new government action (this aligns with their purpose), or if they increase volatility in government spending (they actually tend to smooth it).
Recall that the key advantage of automatic stabilizers is their automatic response to economic changes, which helps stabilize income and demand without the delay or uncertainty of new policies being passed.
Conclude that the correct understanding is that automatic stabilizers help reduce fluctuations in the economy without the need for new government action.
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