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Automatic Stabilizers

How do automatic stabilizers safeguard the economy against the possible occurrence of a depression?

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How do automatic stabilizers safeguard the economy against the possible occurrence of a depression?
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 in general increases, more people are in the higher tax brackets, and so the average tax rate is higher.
· Some kinds of transfer payments and government purchases rise when income drops. Unemployment compensation and income supplements for poor people are examples, as are purchases of services for the poor. When income in general drops, there are more poor people eligible for these transfers and services, so spending on them increases.
These ...

Solution Summary

Automatic Stabilizers are exemplified.

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