Question

The graph below depicts an economy where an increase in aggregate demand has caused inflation. The economy's current level of real GDP (Y2) is above its long-run equilibrium. This is illustrated by the long-run aggregate supply curve (LRAS) and a price level (P2) above the equilibrium value of Pe Fiscal Policy LRAS AS AD. 1 Real GDP Which of the following is an example of an automatic stabilizer that would help this economy move toward fll employment again? A reduction in the average tax rate A decrease in government purchases An increase in the average tax rate A reduced need for government transfer payments Price Level AD

Answer 1

Automatic stabilizers act automatically and do not require government discretion for action . Changes in government purchases and tax rate ( average tax rate ) requires government mandate . Only if there is inflation and rise in aggregate demand , it means there is more production and employment , so automatically government transfer payment like unemployment insurance etc declines . This takes out some extra money supply in the economy and thus helps to restore equilibrium . Answer : D