During a severe economic downturn, a nation's government budget deficit increases. Tax revenues from income and corporate profits fall by £25 billion, and expenditure on safety-net welfare benefits automatically rises by £10 billion. At the same time, the parliament passes an emergency fiscal package authorizing £15 billion of new spending on public utility upgrades.
Which of the following correctly classifies these changes to the government's fiscal position?
Automatic stabilizers account for £35 billion of the increased deficit, while discretionary fiscal policy accounts for £15 billion.
Discretionary fiscal policy accounts for £35 billion of the increased deficit, while automatic stabilizers account for £15 billion.
Automatic stabilizers account for £25 billion of the increased deficit, while discretionary fiscal policy accounts for £25 billion.
Discretionary fiscal policy accounts for £50 billion of the increased deficit, and automatic stabilizers have no effect.
