How do automatic stabilizers work to mitigate fluctuations in the ...

[pane00]

How do automatic stabilizers work to mitigate fluctuations in the level of economic activity?
 
  What will be an ideal response?

Question 2

In a business cycle, the date at which a recession starts is called a trough.
 
  Indicate whether the statement is true or false

[bigcheese9]

Answer to Question 1

When income is high, the government collects more taxes and pays out less in transfer payments. Since the increase in taxes takes funds out of the hands of consumers, consumer spending is reduced. When output is low, as it is in a recession, the government collects less taxes and pays out more in transfer payments, putting funds into the hands of consumers and thereby increasing consumer spending. By increasing consumer spending in bad times and decreasing it in good times, the automatic stabilizers buffer fluctuations in spending.

Answer to Question 2

FALSE