What are automatic stabilizers? Provide two examples.

• A. Features of fiscal policy that dampen fluctuations automatically without new legislation; examples include progressive taxation and unemployment benefits.
• B. Tools used only through new legislation to counteract cycles.
• C. Policies that always increase deficits in downturns.
• D. Monetary policy rules tied to inflation targets.

Answer: (A)

Automatic stabilizers are built-in features of the fiscal system that dampen business-cycle fluctuations without needing new laws. They respond automatically to changes in income and unemployment. For example, a progressive income tax system means tax payments fall as people earn less, so households keep more of what they earn during a downturn. At the same time, unemployment benefits rise automatically as more people lose jobs, providing transfers that support spending when the economy weakens. In expansions, tax receipts rise and unemployment benefits fall, helping to cool demand. This automatic response helps stabilize disposable income and aggregate demand without any new legislation. The other options describe discretionary fiscal tools, monetary policy actions, or an incorrect blanket statement about deficits, which aren’t automatic stabilizers.