Automatic Stabilisers
Definition Automatic stabilisers: Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle.
Example of Automatic stabilizers
- High Growth - In a period of high economic growth, automatic stabilizers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues - people earn more and so pay more income tax (note the tax rate doesn't change, the amount received just becomes higher). With higher growth, there will also be a fall in unemployment so the government will spend less on unemployment benefits.
- Recession. In a recession, economic growth becomes negative. However, automatic stabilisers will help to limit the fall in growth. With lower incomes people pay less tax, and government spending on unemployment benefits will increase. This increase in benefit spending and lower tax helps to limit the fall in aggregate demand.
Graph of Automatic Stabilisers
It is hard to make a graph for automatic stabilisers. Basically, if automatic stabilisers are working the fluctuations in the growth cycle will be lessened. However, it is difficult to isolate the impact of automatic stabilisers on the growth rates.
Related
- Fiscal Policy - discretionary stabilisers
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