Classify the actions as either discretionary spending or an automatic stabilizer.

a. Economic growth increases personal and corporate income, increasing tax payments.
b. A bill is passed to increase unemployment benefit payments.
c. Government spending on welfare increases due to an increase in applicants.
d. Congress votes to cut government spending in order to balance the budget.
e. A law is enacted that increases Medicare coverage.
f. The government cuts taxes to stimulate consumer spending.
g. The government increases tax rates to prevent inflation.
h. Tax revenue falls as a result of a recession reducing personal income and corporate profits.
i. An increased number of layoffs increases government spending on unemployment benefits.

WORD BANK
Automatic stabilizer
Discretionary spending

a. A bill to increase unemployment benefits is discretionary spending because the government has to make a decision to change something; it does not happen automatically as the economy changes.

b. Cuts in government spending to balance the budget are also a decision that is made that does not happen automatically.

c. A law to increase Medicare coverage does not happen automatically and requires action by the government.

d. Tax cuts to stimulate spending must be written into effect. Since the tax rate is set and does not change by itself, it is discretionary spending.

e. Increasing tax rates also does not happen by itself and must be changed by the government, making it discretionary spending as well.

f. Increased tax payments from economic growth is an automatic stabilizer. As the economy grows, people have more income and firms have more profits. Both therefore pay more in taxes, increasing tax payments automatically.

g. More spending on welfare due to more applicants is an automatic stabilizer too. As more people apply for and receive welfare due to a bad economy, government spending will automatically increase.

h. Tax revenue depends on the level of economic activity. When people are laid off or earn less during a recession, tax revenue falls. Likewise, a decrease in corporate profits automatically decreases taxes owed.

i. More spending on unemployment benefits due to increased layoffs is automatic because when more people are laid off and apply for unemployment benefits, spending automatically increases.