Examine the contribution that automatic stabilizers play in creating a stable economy.
Give examples of the automatic stabilizers and use them to illustrate their significance. Why is there an interest in using fiscal policy to stabilize the economy when the automatic stabilizers are available?© BrainMass Inc. brainmass.com October 24, 2018, 6:37 pm ad1c9bdddf
An economic policy or program that increases or decreases automatically to offset the current economic trend without government assistance.
: An example of such a policy would be unemployment insurance.
In economics, an automatic stabilizer is a government policy of taxes and transfer payments that stabilize GDP without requiring policy-makers to take explicit action. Unemployment benefit is an example of an automatic stabilizer.
We have seen that changes in government purchases, taxes and transfer payments can have an impact on equilibrium aggregate demand. When a government deliberately changes its spending or taxation policies in order to influence aggregate demand, we call that "fiscal policy." But there is another, more automatic way that spending and taxation can influence the economy.
· Some kinds of taxes rise more than proportionately when income increases. A progressive income tax is an example of this. "progressive" means that the tax rate is higher on higher incomes. Thus, when income ...
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