How do taxes and needs-tested spending programs work as automatic fiscal policy to dampen the business cycle?
What will be an ideal response?
Taxes, such as income taxes, and needs-tested spending programs both work as automatic fiscal policy because they decrease the effect a change in income has on aggregate expenditure. For instance, when income decreases, consumption expenditure and aggregate expenditure decrease. But with the fall in income, income taxes decrease and needs-tested spending increase so that disposable income does not fall as much as does income. The smaller fall in disposable income means that the fall in consumption expenditure is smaller, so that the fall in aggregate expenditure is likewise smaller.
You might also like to view...
Points outside the production possibilities curve represent combinations of products that are
A) unattainable. B) attainable only if the economy's resources are not fully employed. C) attainable if the economy's resources are either fully employed or not fully employed. D) attainable only if the economy's resources are fully employed.
According to monetarists, changes in velocity can
A) lower GDP B) raise GDP C) shift the SRAS, but not the LRAS D) a and b E) a, b and c