Question : Automatic stabilizers refer to:
Option 1: Government policies that automatically stabilize the economy during a recession
Option 2: Business practices that automatically stabilize the economy during a recession
Option 3: Changes in interest rates that automatically stabilize the economy during a recession
Option 4: Changes in tax rates that automatically stabilize the economy during a recession
Correct Answer: Changes in tax rates that automatically stabilize the economy during a recession
Solution : The correct answer is (d) Changes in tax rates that automatically stabilize the economy during a recession
Automatic stabilizers are features of a country's fiscal policy that are built into the tax and transfer systems. They work to automatically stabilize the economy during economic downturns, such as recessions, without requiring explicit government intervention or discretionary decisions.
During a recession, automatic stabilizers operate in such a way that they help stimulate economic activity and support individuals and businesses. One key mechanism is through changes in tax rates. During a recession, tax revenues tend to decrease due to lower income levels and reduced economic activity. This automatically results in a decrease in tax collections, providing some relief to households and businesses.
By reducing tax burdens during a recession, automatic stabilizers aim to bolster disposable income, increase consumer spending, and stimulate economic growth. This helps to stabilize the economy by offsetting the contractionary forces that typically occur during recessions.
Question : The fiscal policy refers to changes in:
Option 1: Government expenditure and taxation
Option 2: Interest rates and money supply
Option 3: Exchange rates and trade policies
Option 4: Labor market regulations
Question : The multiplier effect refers to:
Option 1: The magnification of changes in autonomous expenditure on real GDP
Option 2: The decrease in consumption as income increases
Option 3: The decrease in investment as interest rates rise
Option 4: The increase in government expenditure during a recession
Question : An increase in the nominal exchange rate can be caused by:
Option 1: Lower interest rates in the domestic economy.
Option 2: Higher inflation rates in the domestic economy.
Option 3: Lower inflation rates in the domestic economy.
Option 4: Government intervention in the foreign exchange market.
Question : In a floating exchange rate system, the exchange rate is determined by market forces, and fluctuations in the rate are caused by changes in ________.
Option 1: government policies
Option 2: inflation rates
Option 3: interest rates
Option 4: supply and demand
Question : The natural rate of unemployment refers to the:
Option 1: Rate of unemployment that prevails when the economy is at full employment
Option 2: Rate of unemployment that prevails during a recession
Option 3: Rate of unemployment that prevails during inflation
Option 4: Rate of unemployment that prevails during deflation
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