How are Automatic Stabilizers Used to Combat Inflation?
In today's economy, there are devices present called automatic stabilizers. Automatic stabilizers, are mechanisms which aid in the correction of an economic problem without the interference of anyone or anything. They are perhaps most useful to combat demand - pull inflation. Demand - pull inflation, is when prices rise because the economy cannot produce enough goods to satiate the economy. An automatic stabilizer, that is beneficial to combat such a problem, is a progressive tax. A progressive tax, is a tax that becomes a higher rate for each increasing level of gross domestic product. If such a tax is present within the economy, when the society becomes more prosperous, such as in the situation with demand-pull inflation, the citizens are taxed more, therefore decreasing the marginal propensity to consume, and decreasing consumption. The marginal propensity to consume is the fraction of any change in disposable income spent for consumer goods. If this decreases, demand will not be as high above, or even above where the supply is, therefore reducing the demand - pull inflation.
Another way to stabilize demand - pull inflation is to reduce government spendings. Government spendings, are the spending that the government make with the tax revenues, and they add to the gross domestic product. An automatic stabilizer that will lower gross domestic product is welfare. As income rises, there are less people who need welfare, therefore reducing the amount of government spending, and lowering the gross domestic product.
Due to such automatic stabilizers as progressive tax rates and the decrease of government spending due to welfare, therefore a decrease in government borrowing, therefore a decrease in the demand for the dollar, therefore a decrease in the interest rate, which would cause a decrease in the foreign demand for dollar, which would cause the dollar to depreciate, therefore lowering...
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