What Is the Effect of an Automatic Stabilizer, Such as a Progressive

question 79

Multiple Choice

What is the effect of an automatic stabilizer, such as a progressive tax system, in relation to government spending?  

• A) It keeps taxes and government spending in a constant ratio to each other throughout the business cycle. 
• B) It increases taxes relative to government spending during contractions, and decreases taxes in expansions. 
• C) It decreases taxes relative to government spending during contractions, and increases taxes in expansions. 
• D) It increases taxes relative to government spending throughout the business cycle.

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Definitions:

Interest Expense

The financial charge for an entity using borrowed capital over a time frame.

Notes Payable

Short-term or long-term liabilities representing amounts owed on written promises to pay a specific sum of money at a future date.

Market Rate

The current price or cost of a good, service, or financial asset in the marketplace, determined by supply and demand dynamics.

Par Value

The nominal dollar amount assigned to a security by the issuer.