Automatic Stabilizers Case Study

1. Give an example of a government policy that acts as an automatic stabilizer. Explain why this policy has this effect. According to our text, automatic stabilizers are changes in fiscal policy that stimulate aggregate demand when the economy goes into recession without policymakers having to take any deliberate action. Automatic stabilizers come in the form of our tax system and government spending. As an individual’s income increases, they get put in a higher tax bracket. When the economy goes into a recession, the amount of taxes the government receives falls. The amount of taxes that the government receives is tied into economic activity so as earnings and incomes fall in a recession, the government’s revenue falls as well. In a recession,