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CA Foundation · Business Economics · Business Cycles

Which of the following is an example of an automatic stabiliser that works to reduce the severity of business cycle fluctuations without any new government decision?

A progressive income tax system is the automatic stabiliser. When incomes fall in a recession, tax collections fall automatically, cushioning disposable income and demand. Stimulus packages, repo rate changes, and GST cuts are discretionary policies because they need a fresh decision by the government or the central bank.

  1. AA mid-year announcement of an infrastructure stimulus package
  2. BA change in the repo rate by the monetary policy committee
  3. CA progressive income tax system under which tax collection falls as incomes fall in a recessionCorrect
  4. DA one-time reduction in GST rates passed by the GST Council

Explanation

Automatic stabilisers operate through existing rules. Under progressive taxation, tax revenue falls automatically as incomes fall, which cushions disposable income in a recession. The other options all need a fresh policy decision, so they are discretionary measures.

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