Question

critics of stabilization policy argue that
(x) the policy can be a source of, instead of a cure for, economic fluctuations because the lags associated with a discretionary policy create the possibility that an expansionary fiscal policy is implemented when the economy has already adjusted on its own to the natural rate of output.
(y) lags exist between the time that an economic downturn is recognized, when an appropriate fiscal policy is passed in the legislature, when the policy is implemented and when the policy impacts the economy.
(z) the impact of policy may last longer than the problem it was designed to offset.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

which of the following statements is (are) correct?
(x) Automatic stabilizers are changes in taxes or government spending that increase aggregate demand without requiring policymakers to act when the economy goes into recession.
(y) Open market operations by the Fed are automatic stabilizers because the FOMC automatically responds to a recession by decreasing the money supply.
(z) If there is no change in the unemployment compensation program, then the total amount of benefits paid to participants in the program will fall during economic expansions and rise during recessions.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Answer 1

1.

Stabilisation policy refers to the actions undertaken by the central bank of a country which basically has the sole aim of smoothening the economic fluctuations (like boom and recession) that affects a capitalist economy.However, critics has been critisizing it for various reasons.

Due to the presence of time lags between the implementation of the policy, the economy might be worse off because the market forces naturally correct themselves. An external force in existence would distract the economy and cause it to move wayward.

Further, there are recognition lag, implementation lag and administrative lags in the economy. Moreover, the impact of the policy has the potential to last longer than intended, causing more fluctuations in turn.

Hence, option (A) is the correct answer as (x), (y) and (z) are all correct.

2.

Automatic stabilizers are basically tax and government spending/ transfers which help to stabilise the economy from fluctuations without any active action by the policymakers. Hence (x) is correct.

Open market operations by the Fed refers to the act of buying and selling of government bonds and associated securities (like Treasury Bills) which targets to regulate the money supply of the economy in situations of boom and recession. Hence, it is an actively managed action / policy which is undertaken for stabilisation in the economy. Hence, it is not an automatic stabiliser. So, (y) is incorrect.

Unemployment compensation program is all about providing a sum of money / allowance / benefits / compensation to the unemployed people by the government. During economic expansions, aggregate demand rises in the economy. During this time, the government will try to control aggregate demand and increase taxes and take away money from the people. Accordingly, the allowance for unemployment falls. For recession, the aggregate demand has to be increased, so the unemplyement benefits rise. Hence, when there is no change in the unemployment compensation program, then the total amount of benefits paid to participants in the program will fall during economic expansions and rise during recessions.SO, (z) is correct.

So correct option is (C).