Question

When GDP falls during a recession and tax revenues automatically (increase/decrease), government spending increases and cushions the economic contraction.

Answer 1

When GDP falls during a recession, tax revenues typically **decrease**. This is due to the automatic stabilizers in the economy, where lower incomes lead to lower tax collections. However, government spending often increases in response to economic downturns, as governments may implement stimulus measures or increase social welfare spending to help cushion the economic contraction. The net effect is that while tax revenues decrease, government spending can help mitigate the impact of the recession.