Author Question: Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the ... (Read 58 times)

codyclark · **on:** Jun 29, 2018

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

A) Output will increase. B) Short-run aggregate supply will shift to the left.
C) Unemployment will decline. D) Prices will decline.

Question 2

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

What will be an ideal response?

Ksanderson1296 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

B

Answer to Question 2

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.