Monetary Policy Tools

A

Such built-in stabilizers exist independently of any policy change: tax revenues necessarily fall during a recession (as the economy contracts, there is less income to tax) and government expenditures necessarily rise (more individuals receive government transfers such as unemployment benefits or welfare payments). The converse is true for an inflationary environment: tax revenues are in excess of government expenditures creating a budget surplus. The consequence of these automatic reactions is that during a recession, the economy is stimulated by higher government spending and during inflation economic activity is reduced by smaller government spending.