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IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses

During a recession, tax receipts fall and unemployment benefits rise without any new government decision, which moderates the fall in aggregate demand. Which statement about this mechanism is correct?

It is an automatic stabiliser. Existing tax and benefit rules cause tax revenue to fall and transfer payments to rise in a recession, cushioning demand, and the same process automatically widens the budget deficit during the downturn.

  1. AIt is discretionary fiscal policy and needs legislation each time
  2. BIt is an automatic stabiliser and tends to widen the budget deficit in a downturnCorrect
  3. CIt is monetary policy operated by the central bank
  4. DIt is a supply-side measure that raises long-run potential output
  5. It is an automatic stabiliser and tends to produce a budget surplus in a downturn

Explanation

Automatic stabilisers operate through existing tax and transfer rules, so no new decision is needed. In a recession lower tax revenue and higher transfers worsen the budget balance, widening the deficit. A surplus would arise in a boom, not a downturn.

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