Unemployment triggers automatic stabilizers

Steps:

• Employment falls, increasing unemployment in the economy.
• Higher unemployment leads to more claims for state benefits like unemployment insurance.
• Government automatically increases spending to cover these benefits.
• This fiscal response rises without new policy changes.

Why A is correct:

• Automatic stabilizers in high-income economies, such as unemployment benefits, directly increase government expenditure when employment drops, per fiscal policy principles.

Why the others are wrong:

• B: Income tax revenue falls as fewer people earn taxable income.
• C: Output tax revenue (e.g., VAT) declines with reduced economic activity and consumption.
• D: Real output growth slows or turns negative due to lower employment and productivity.

Final answer: A