Which of the following is an example of an automatic stabilizer?

a. Medicare b. transportation funding c. Social Security d. unemployment insurance

Written by Mark R in Economics

Better Answer

The answer is D. I'm going to assume you have some idea of macroeconomic concepts. As the economy moves into a recession, unemployment increases. Thus the amount of people claiming unemployment insurance will increase. This increases government expenditures, which is a component of aggregate demand. Aggregate demand increases and real GDP increases also. This moves the economy closer to recovery, and reduces unemployment. Unemployment insurance acts automatically, without the need for government policy/interventions, to boost the economy if it declines too much. Hope this helped :) E: To ollie, you are correct in your explanation, but what they meant by Social Security is the benefits that retired people receive.

Written by Infpdreamer

Other Answers

An automatic stabiliser is a fiscal policy which is not discretionary and smooths out trends in the economic cycle. This means spending must rise in booms and fall in slumps / tax receipts must rise in booms and fall in slumps.

a. The government chooses how much to spend on health-care in the budget. Therefore this is discretionary fiscal policy and not an automatic stabiliser
b. See a.
c. This is an automatic stabiliser as in a boom unemployment falls so social security spending falls. This will slow down the boom and smooth the economic cycle. In a downturn social security spending will rise because more people will become unemployed this too will smooth the economic cycle.
d. This is not paid for by the state so is not fiscal policy of any sort!

Income tax is another automatic stabiliser. Think about how it works and why this is the case...

Written by Ollie T

The answer is D. I'm going to assume you have some idea of macroeconomic concepts. As the economy moves into a recession, unemployment increases. Thus the amount of people claiming unemployment insurance will increase. This increases government expenditures, which is a component of aggregate demand. Aggregate demand increases and real GDP increases also. This moves the economy closer to recovery, and reduces unemployment. Unemployment insurance acts automatically, without the need for government policy/interventions, to boost the economy if it declines too much. Hope this helped :) E: To ollie, you are correct in your explanation, but what they meant by Social Security is the benefits that retired people receive.

Written by Infpdreamer