Give an example of an automatic stabilizer. Explain how automatic stabilizers work in the case of recession

What will be an ideal response?

Examples of automatic stabilizers are unemployment insurance payments and income taxes. (The student only needs to present one example.) Automatic stabilizers change tax receipts and government spending automatically as a result of fluctuations in the business cycle. This occurs without discretionary actions on the part of government. In the case of recession, they would change automatically to stimulate spending in the economy. During a recession, employment declines and government spending on unemployment insurance payments increases. This should raise disposable income and consumer spending above what they would otherwise be. During a recession, income tax receipts decline as incomes decline. This automatic decline in income tax revenues keeps disposable income and consumer spending from falling as much as they would without automatic stabilizers.