📚 Learning Guide
Fiscal Policy in Recessions
hard

How do automatic stabilizers in fiscal policy impact aggregate demand during a recession, and what implications does this have on public debt?

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Choose the Best Answer

A

They increase aggregate demand, reducing public debt

B

They decrease aggregate demand, increasing public debt

C

They stabilize aggregate demand, potentially increasing public debt

D

They have no effect on aggregate demand or public debt

Understanding the Answer

Let's break down why this is correct

Answer

Automatic stabilizers are features of fiscal policy that help stabilize the economy without the need for new government action. During a recession, people often lose their jobs, which means they earn less money and spend less. However, automatic stabilizers like unemployment benefits or food assistance kick in to provide financial support to those affected, helping to maintain their spending levels. This increase in spending can support aggregate demand, which is the total demand for goods and services in the economy, and can help the economy recover more quickly. However, when these stabilizers are used more, it can increase public debt since the government is spending more money to support its citizens during tough times.

Detailed Explanation

Automatic stabilizers help keep spending steady during a recession. Other options are incorrect because Some might think stabilizers boost demand and lower debt; It's a common mistake to think stabilizers cut demand.

Key Concepts

aggregate demand
automatic stabilizers
public debt
Topic

Fiscal Policy in Recessions

Difficulty

hard level question

Cognitive Level

understand

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