Answer: Social benefits through transfer payments

## Explanation **Automatic stabilizers** are fiscal policy mechanisms that automatically adjust government spending and tax revenues in response to changes in economic conditions, without requiring explicit legislative action. Let's analyze each option: **A. Capital expenditures** - These are discretionary government investments in infrastructure, buildings, and other long-term assets. They require explicit government decisions and are not automatic. **B. Social benefits through transfer payments** - **CORRECT ANSWER**. Transfer payments like unemployment benefits, welfare payments, and social security are classic examples of automatic stabilizers. When the economy weakens and unemployment rises, more people qualify for these benefits, automatically increasing government spending and supporting aggregate demand. Conversely, when the economy improves, fewer people need these benefits, automatically reducing government spending. **C. Current government spending on goods and services** - This includes government purchases of goods and services for current use. While this can be used as fiscal policy, it typically requires discretionary decisions by policymakers and is not automatic. ### Key Characteristics of Automatic Stabilizers: 1. **Automatic response** to economic conditions 2. **Counter-cyclical effect** - they increase during recessions and decrease during expansions 3. **Built-in features** of existing tax and spending programs 4. **No legislative action required** for activation Other examples of automatic stabilizers include: - Progressive income tax systems (tax revenues automatically fall during recessions as incomes decline) - Corporate taxes (vary with corporate profits) - Means-tested welfare programs Automatic stabilizers help smooth the business cycle by providing fiscal stimulus during downturns and fiscal restraint during expansions, all without the delays associated with discretionary fiscal policy decisions.

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