Which of the following work as built-in stabilisers, that is, without the need for any decision-maker to take action?
(A) Welfare payments that help sustain consumption during a slump
(B) Corporations maintaining their dividends in the face of a change in income in the short run
(C) Households trying to maintain their previous living standards
(D) The government raising its spending when investment falls
(E) A proportional income tax
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (B), (C) and (E) only
A built-in stabiliser works on its own. No one has to decide anything when income changes.
(A) Welfare payments that help sustain consumption during a slump — Correct. They rise automatically when incomes fall.
(B) Corporations maintaining their dividends in the face of a change in income in the short run — Correct. This is a private sector built-in stabiliser.
(C) Households trying to maintain their previous living standards — Correct. Households keep up their spending, which steadies demand.
(D) The government raising its spending when investment falls — Incorrect. This is a deliberate action, called discretionary fiscal policy.
(E) A proportional income tax — Correct. It makes disposable income less sensitive to changes in GDP.
NCERT (2026-27): “Box 5.1: Fiscal Policy … That is, if investment falls from I0 to I1, government spending can be raised from G0 to G1 so that autonomous expenditure (C + I0 + G0 = C + I1 + G1) and equilibrium income remain the same. This deliberate action to stabilise the economy is often referred to as discretionary fiscal policy to distinguish it from the inherent automatic stabilising properties of the fiscal system. As discussed earlier, proportional taxes help to stabilise the economy against upward and downward movements. Welfare transfers also help to stabilise income.” “During boom years, when employment is high, tax receipts collected to finance such expenditure increase exerting a stabilising pressure on high consumption spending; conversely, during a slump, these welfare payments help sustain consumption. Further, even the private sector has built-in stabilisers. Corporations maintain their dividends in the face of a change in income in the short run and households try to maintain their previous living standards. All these work as shock absorbers without the need for any decision-maker to take action. That is, they work automatically. …” |