Which one of the following functions as an automatic stabilizer in the context of fiscal and monetary policies of an economy?

Automatic stabilizers are built-in features of the government budget that dampen economic fluctuations without requiring discretionary legislative action [3]. They function by automatically increasing expenditures or decreasing taxes when economic conditions worsen, thereby supporting aggregate demand [3]. Personal income tax is a primary example of an automatic stabilizer. In a progressive tax system, as national income falls during a recession, individuals move into lower tax brackets and total tax collections decline automatically, leaving more disposable income for households [4]. Conversely, during an expansion, tax revenues rise, helping to prevent overheating [2]. Other options like the reverse repo rate and open market operations are discretionary monetary policy tools used by the central bank to manage liquidity and interest rates, rather than automatic fiscal mechanisms. Bond prices are market-determined variables influenced by interest rates and fiscal dominance [2].

Sources

1. [3] https://one.oecd.org/document/ECO/WKP(2020)44/en/pdf
2. [4] https://www.investopedia.com/terms/a/automaticstabilizer.asp
3. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > National Income Identity for an Open Economy > p. 100