Economic management — Question 51

Answer
The balance deteriorates by $37 billion; both changes cushion the fall in private demand.

Working
Revenue falls $25 billion and benefit expenditure rises $12 billion. Revenue minus spending therefore decreases by $37 billion. Lower tax liabilities retain more income in private hands, while transfers support unemployed households. These responses moderate the contraction without new discretionary decisions; they do not eliminate the downturn.

Marking criteria

• Calculates the $37 billion deterioration. [1 mark]
• Explains both automatic fiscal mechanisms. [2 marks]
• Links disposable income and consumption to stabilisation. [2 marks]