The increase in unemployment compensation that occurs when the economy slows down is an example of:
a discretionary, expansionary fiscal policy.
b discretionary, contractionary fiscal policy.
c automatic, expansionary fiscal policy.
d automatic, contractionary fiscal policy.
The correct answer and explanation is:
The correct answer is c) automatic, expansionary fiscal policy.
Explanation:
When the economy slows down and unemployment rises, the government often provides increased unemployment compensation automatically. This is an example of an automatic stabilizer, which is a built-in feature of the economy that automatically adjusts to economic conditions without the need for new legislation or government action.
In the case of unemployment compensation, the increase occurs as more people become eligible for benefits due to job losses. These benefits act as a stabilizer by providing individuals with income during economic downturns, helping them maintain purchasing power, which in turn supports demand for goods and services in the economy. This automatic increase in government spending helps mitigate the negative effects of the recession.
The policy is expansionary because it increases government spending during an economic slowdown, which is intended to stimulate the economy. The term “expansionary” refers to measures that aim to increase economic activity, boost demand, and reduce the negative impact of a recession. Unlike discretionary policies, which require active government decisions and interventions, automatic stabilizers like unemployment compensation kick in automatically without the need for lawmakers to take specific action.
In contrast, contractionary policies would aim to reduce spending or increase taxes to slow down the economy, which is the opposite of what occurs with automatic stabilizers like unemployment benefits.