Chapter 4R, Problem 25MCQ

To determine

To give an example of an automatic stabilizer.

Explanation of Solution

A balanced budget requirement of the government is an automatic stabilizer as they are always in operation and do not require any new step to tackle recession or slowdown in the economy. Thus, option ‘c’ is the correct option.

The Works Progress Administration established during the Great Depression was a new step by the government to stimulate the economy and boost demand. Since it was a new step, hence it cannot be an automatic stabilizer. Hence, option (a) is incorrect.

Lump sum taxes cannot be automatic stabilizers because they are not progressive as they are fixed for all levels of income and are among the steps taken by the government to curb inflation. Thus, option (b) is incorrect.

Sales tax are step taken by the government to charge against each sale happening in the economy. Government usually revises its rates according to the economic condition. Hence, option (d) is incorrect.

An economic stimulus is a new step taken by the government to eliminate a slowdown in the economy. Hence, option (e) is incorrect.