Question

Please read the following four examples below. Please identify what they are (i.e., discretionary fiscal policy, monetary policy, or automatic stabilizer) and explain why.  

a) A terrible recession occurs as a result of a bubble in the housing market bursting, and government-funded unemployment compensation is paid out to laid-off workers.

b) As the economy heats up, the resulting increase in equilibrium GDP results in higher income tax payments, which dampen consumption spending somewhat.

c) To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on some government programs to help reduce government spending (G), and thus help reduce inflation.  

d) The Federal Reserve decides to increase the money supply in order to help lower interest rates and stave off a more severe recession.

Answer 1

A) automatic stabilizer:

These are Economic policies that work independently without any government intervention, & are designed to offset the influence of Business cycle in the economy.

Like taxes automatically rise in case if expansion.

& Unemployment benefit rise in contraction.

Thus fiscal policy gets automatically expansionary during recession & automatically contractionary during expansion.

Thus economy fluctuates less during business cycle, with automatic stabilizer

B) automatic stabilizer

C) discretionary fiscal policy

Is followed by govt , related to changing taxes or spending & is used to correct the disequilibrium in the Economy in events of busimbus cycle of recession & expansion.

Thus this implies that deliberate actions by policy makers.rather than automatic adjustment.

As during recession, govt has passed law to cut taxes & increase G to stimulate Economy.

D) expansionary monetary policy, bcoz money supply has been increased