econ hw 3-12 - recession Q6 Automatic stabilizers are...

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Q2. Options are to reduce government spending, increase taxes, or some combination of both. A person wanting to preserve the size of government might favor a tax increase but wouldn't want to decrease government spending. Someone who thinks that the public sector is too large might favor a decrease in government spending. Q4. When the economy enters a recession, tax revenue falls (b/c U up and C down). If tax revenue falls and the government is required to balance the budget, they will be forced to either cut spending or increase taxes – both of which are contractionary policies likely to worsen the
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Unformatted text preview: recession. Q6. Automatic stabilizers are built-in responses to changes in GDP (gross domestic product). They increase budget deficits during a recession, and increase budget surpluses during periods of inflation. E.g. tax revenue: As GDP rises, tax revenue rises, but government spending remains constant. Because tax revenue > government spending, a budget surplus is created. A surplus will have a contractionary effect on the economy, relieving inflationary pressures. During a recession, tax revenue decreases budget deficit will help increase GDP (expansionary effect)....
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