AP Macroeconomics 3.9 Automatic Stabilizers Questions
Explain how taxes and transfer payments change automatically with income, moderating business cycles and producing cyclical budget outcomes.
- Syllabus
- Effective Fall 2022
- Course
- AP Macroeconomics
Exam points
- distinguish automatic stabilizers from fiscal actions that require a new discretionary decision
- trace falling taxes and rising transfers through disposable income and consumption during a recession
- trace rising taxes and falling transfers through disposable income and consumption during an expansion
- derive the automatic movement toward a budget deficit in recession or surplus in expansion
- explain why forced annual budget balance can intensify rather than moderate a recession
Covered syllabus points
Question 1
[Maximum number: 1]
Assume that Nepal is in long-run macroeconomic equilibrium and has an open economy.
Assume instead that no discretionary policy actions are taken. Explain how automatic stabilizers in the short run would reduce the effect of the change in real output shown on your graph in part B.
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Explain that as real income rises, tax revenues will increase automatically (and/or transfer payments will decrease automatically), thereby slowing the rate at which disposable income is increasing, which will slow consumption growth.
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