Which of the following is an example of an automatic stabilizer in fiscal policy?

• A. Progressive income taxes
• B. Expanding discretionary spending mid-year
• C. New targeted tax credits enacted by Congress
• D. Tariff adjustments

Answer: (A)

Automatic stabilizers are built-in fiscal features that automatically dampen economic swings without new legislation. The best example is the progressive income tax system. As people’s incomes rise, their tax burden grows, which helps cool down demand during booms. When incomes fall in a recession, tax payments decrease, leaving households with more disposable income and helping to stabilize consumption and demand. This happens automatically, without Congress having to act.

Expanding discretionary spending mid-year isn’t automatic because it requires new legislative approval. New targeted tax credits enacted by Congress also rely on passing new laws, so they’re not automatic. Tariff adjustments are policy choices that don’t automatically respond to economic conditions.