Due to automatic stabilizers, when income rises, government transfer spending: 
A. Increases and tax revenues decrease
B. Decreases and tax revenues increase
C. And tax revenues decrease
D. And tax revenues increase

Answer: B

Explanation:

Automatic stabilizers are tools built into federal budgets that reduce the impact of the business cycle. They are "automatic" because they happen without requiring anyone to take any action. When aggregate demand decreases, two actions kick in automatically. First, income taxes will go down because the amount of income has decreased. At the same time, transfer payments like unemployment compensation and welfare benefits will increase. As a result, consumption will not decrease by as much as it would have.

Automatic stabilizers might not smooth out the business cycle completely, but they do make the swings of the business cycle less extreme. Automatic stabilizers are any part of the government budget that offsets fluctuations in aggregate demand. They offset fluctuations in demand by reducing taxes and increasing government spending during a recession, and they do the opposite in expansion.

Taxes work as an automatic stabilizer by increasing disposable income in downturns and decreasing disposable income during booms.