Thursday 18 March
  1. An "automatic stabilizer" is:
  1. a fin-like thing below the water line on a ship which stops it rocking;
  2. a feature of government tax and expenditure structures which makes [G - T] larger when real GDP is smaller
  3. a feature of government tax and expenditure structures which makes [G - T] smaller when real GDP is smaller
  4. the tendency of congress to react to changes in growth by changing fiscal policy.
a. is correct in a dictionary sense, and is the source of the analogy for the economic jargon sense. An automatic stabilizer is a feature of the government tax and expenditure structure that tends to dampen, i.e. reduce, the business cycle (oscillations in the economy around potential GDP, i.e. full employment output) because when output [and therefore income] increases, it increases the leakages of purchasing power out of the circular flow (via taxes increasing) or reduces the injections into the circular flow, i.e. reduces government spending. I.e. the economics right answer is b, when GDP is smaller, an automatic stabilizer makes [G - T] larger, putting more purchasing power into the circular flow when output and income falls.
  1. Which of the following is a NOT an automatic stabilizer?
  1. A progressive income tax;
  2. Unemployment compensation;
  3. Property taxes;
  4. Sales and excise taxes.
When income goes up, income tax collections go up, taking purchasing power out of the circular flow, so an income tax is an automatic stabilizer;

When output goes down, unemployment increases, so government spending on unemployment compensation increases, putting purchasing power into the circular flow, so that is an automatic stabilizer.

When output and income increase, consumption spending increases, so more is paid in sales and excise taxes, taking purchasing power out of the circular flow, so sales and excise taxes are automatic stabilizers.

But, c, property taxes depend on the assessed value of the property, not the level of income and output; so property taxes do not change when output and income change, and are NOT an automatic stabilizer.