Multiple Choice
Which of the following actions would be consistent with an attempt by the Federal Reserve to reduce inflation?
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19. Fiscal Policy
Introduction to Fiscal Policy
Multiple Choice
Which of the following is an example of an automatic fiscal policy stabilizer?
A
A government stimulus package
B
Unemployment insurance payments
C
A temporary tax rebate passed by Congress
D
A reduction in the central bank's interest rate
Verified step by step guidance1
Step 1: Understand what an automatic fiscal policy stabilizer is. These are government programs or policies that automatically adjust to economic conditions without the need for new legislation, helping to stabilize the economy during fluctuations.
Step 2: Identify the characteristics of each option. A government stimulus package and a temporary tax rebate require new legislative action, so they are discretionary fiscal policies, not automatic stabilizers.
Step 3: Recognize that unemployment insurance payments increase automatically when more people lose jobs during a recession, providing income support without new laws, which fits the definition of an automatic stabilizer.
Step 4: Note that a reduction in the central bank's interest rate is a monetary policy action, not a fiscal policy, so it does not qualify as a fiscal policy stabilizer.
Step 5: Conclude that among the options, unemployment insurance payments are the example of an automatic fiscal policy stabilizer because they automatically respond to economic downturns by increasing government spending.
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