Option 1: Personal income tax functions as an automatic stabilizer in the context of fiscal and monetary policies of an economy.

Explanation: An automatic stabilizer refers to a policy or mechanism that helps to stabilize the economy without any actions needed from policymakers. In the case of personal income tax, it can act as an automatic stabilizer as it is directly linked to individuals` income levels. When the economy is facing a downturn and incomes decrease, individuals` tax payments also decrease, providing them with more disposable income. This increased disposable income can then be used to stimulate consumption and boost economic activity. On the other hand, during an economic upswing, incomes increase, leading to higher tax payments and reducing disposable income. This helps to moderate excessive economic growth and prevent inflationary pressures. Therefore, personal income tax acts as an automatic stabilizer as it adjusts to the changing economic conditions, helping to smooth out fluctuations in the economy.

Alert - correct answer should be 3: Open market operation. Open market operations refer to the buying and selling of government securities by the central bank. By buying government securities, the central bank injects money into the economy, increasing liquidity and stimulating economic activity. Conversely, selling government securities reduces money supply and helps to control inflationary pressures. These actions