Explanation

Automatic stabilizers are fiscal mechanisms that automatically adjust government spending and taxation in response to economic conditions without requiring explicit legislative action. They help stabilize the economy by:

1. Increasing government spending during economic downturns
2. Reducing tax collections during recessions
3. Decreasing government spending during economic expansions
4. Increasing tax collections during booms

Let's analyze each option:

A. Tax rate changes - ❌ Incorrect Tax rate changes typically require legislative action and are considered discretionary fiscal policy, not automatic stabilizers. While the tax system itself can be an automatic stabilizer (through progressive taxation), changing tax rates requires deliberate policy decisions.

B. Infrastructure spending - ❌ Incorrect Infrastructure spending is a form of discretionary fiscal policy that requires legislative approval. It's not automatic because it doesn't automatically adjust based on economic conditions without government intervention.

C. Payment of unemployment benefits - ✅ Correct Unemployment benefits are a classic example of an automatic stabilizer because:

• During economic downturns, more people become unemployed, automatically increasing government spending on unemployment benefits
• During economic expansions, fewer people are unemployed, automatically decreasing these payments
• This happens without any new legislation or policy changes

Why Unemployment Benefits Work as Automatic Stabilizers:

1. Counter-cyclical effect: They increase during recessions when aggregate demand is falling, providing income support to unemployed workers
2. Automatic adjustment: The system responds automatically to changes in unemployment rates
3. Stabilizing effect: By maintaining consumer spending during downturns, they help moderate economic fluctuations

Other Examples of Automatic Stabilizers:

• Progressive income tax systems (tax collections automatically fall during recessions)
• Corporate profit taxes (automatically decline when profits fall)
• Means-tested welfare programs (automatically adjust based on income levels)

Key Distinction:

• Automatic stabilizers: Built into the system, operate automatically
• Discretionary fiscal policy: Requires deliberate government action (e.g., stimulus packages, tax cuts, infrastructure spending)