What are automatic stabilizers? How do they help stabilize real GDP?
What will be an ideal response?
Automatic stabilizers are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic stabilizers include induced taxes and needs-tested spending. To see how automatic stabilizers work, consider a decrease in real GDP, that is, a recession. As GDP decreases, people's incomes decrease and so induced taxes, such as income taxes, decrease. As a result, people's disposable incomes do not decrease by as much as their total income and so consumption expenditure does not decrease by as much as it would otherwise. Moreover, as the economy moves into a recession, needs-tested spending, such as unemployment benefits, increases. The increase in needs-tested spending helps keep people's disposable incomes higher than otherwise and so, once again, consumption expenditure does not decrease by as much as it would otherwise. Because consumption expenditure is greater than otherwise, aggregate demand remains greater than otherwise and so the decrease in real GDP is lessened.
You might also like to view...
Money serves as a medium of exchange when:
A. it is a basic measure of economic value. B. it is a means of holding wealth. C. it is used to purchase goods and services. D. there is direct trade of goods and services.
Which of the following is the treaty that took the participating countries from a free trade area to a common market?
A) The Treaty of Rome B) The Maastricht Treaty C) Single European Act D) Treaty on European Union
The law of diminishing marginal returns says that
a. total product will eventually remain constant as more of an input is added to production b. total revenue decreases as output increases, holding technology fixed c. marginal product eventually falls as more of an input is employed d. the quantity demanded of a good decreases as its price rises e. utility falls as more of a good is consumed
Our fastest growing trade imbalance is with
A. China. B. Japan. C. Canada. D. Mexico.