Automatic Stabilizers

Satisfactory Essays
Topics: Public finance, Tax
AUTOMATIC STABILIZERS

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called automatic stabilizers. Both government spending and tax revenues are very sensitive to the state of the economy. Because tax collections are based largely on individual and corporate income, tax revenues will fall sharply during a recession as national income falls. At the same time, government transfer payments for programs such as unemployment insurance and food stamps will also tend to increase during a recession. The result is higher government spending and lower tax collections and the increased likelihood that the government will run a budget deficit. Similarly, when the economy grows rapidly, tax collections increase and government expenditures on transfer payments decrease, and the likelihood of the federal government running a surplus is greater. Now suppose an economy had a balanced federal budget neither deficit nor surplus. An external shock (such as a dramatic increase in oil prices or drought) then plunged the economy into a recession. Tax revenues fall and expenditures on transfer payments increase, resulting in a budget deficit. Believe it or not, the deficit actually serves a valuable role in stabilizing the economy. It works through three channels:

• Increased transfer payments such as unemployment insurance, food stamps, and other welfare payments increase the income of some households, partly offsetting the fall in household income.
• Other households whose incomes are falling pay less in taxes, which partly offsets the decline in their household income. Because incomes do not fall as much as they would have in the absence of the deficit, consumption spending does not decline as much.
• Because the corporation tax depends upon corporate profits and profits fall in a recession, taxes on businesses also fall. Lower corporate taxes prevent businesses from cutting spending as much as they would otherwise during a

You May Also Find These Documents Helpful

  • Good Essays

    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…

    • 416 Words
    • 2 Pages
    Good Essays
  • Good Essays

    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…

    • 396 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    Power System Stabilizers

    • 3442 Words
    • 14 Pages

    Power System Stabilizers Term Project Control of Electric Motors ECE 6670 Gary S Lear December 16, 2013 Table of Contents I. Introduction ........................................................................................................ 1 II. Simulation of Linearized State-Space Model.................................................... 2 A. Open-Loop Simulation ............................................................................ 2 B. PI Automatic Voltage Regulator…

    • 3442 Words
    • 14 Pages
    Powerful Essays
  • Good Essays

    Automatic Clothesline

    • 572 Words
    • 3 Pages

    Chapter 3 Discussion of findings This chapter discusses the answers to the objectives raised in this study. Remotely-Controlled Automatic Clothesline The current system is a clothesline presented in mechanically controlled by magnets. It uses X-10 module interfaced with the stamp to provide power to the clothesline from a remote location. It uses a phototransistor that acts as a motion sensor for clothes moving the line. In figure 1, it shows the software flow chart of the existing system…

    • 572 Words
    • 3 Pages
    Good Essays
  • Good Essays

    http://www.instructables.com/id/easy-polystyrene-glider/ (n.d.). Retrieved from http://www.ehow.com/how_4855562_make-cardboard-glider.html (n.d.). Retrieved from http://www.instructables.com/id/Simple-Cardboard-Flyer-SCF-1/step5/SCF-1-Tail-horizontal-stabilizers/…

    • 1244 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Automatic Thoughts

    • 618 Words
    • 3 Pages

    moving to a different location to attend school, and acclimating to a new environment and academic requirements. Although this list is not all inclusive it does provide necessary information to apply cognitive-behavioral theory to the case study. Automatic Thoughts The case study refers to when Jackie first arrives for professional services because of unexplained symptoms.…

    • 618 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Automatic Clothesline

    • 746 Words
    • 3 Pages

    Bulacan State University Sarmiento Campus “Automatic Clothesline” In partial fulfilment in research methodology Submitted by: Mark Cyrill R. Manzon BSIT-3B Submitted to: Mr. Pedro Abanador Instructor Submitted by: Mark Cyrill R. Manzon BSIT-3B Submitted to: Mr. Pedro Abanador Instructor CHAPTER I PROBLEM AND ITS BACKGROUND Introduction In today’s present era of the technology was evolved…

    • 746 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Automatic tuner

    • 4208 Words
    • 22 Pages

    AUTOMATIC GUITAR TUNER Malaysian Institute of Information Technology, Universiti Kuala Lumpur SEPTEMBER 2013 AUTOMATIC GUITAR TUNER NUR MUHAMAD BIN FADLULLAH TEY (52118211466) MOHAMMAD EZZAT BIN EDROS (52118211381) Report Submitted in Fulfilment of the Requirements For the Diploma of Engineering Technology in Engineering & Computing Malaysian Institute of Information Technology, Universiti Kuala Lumpur SEPTEMBER 2013…

    • 4208 Words
    • 22 Pages
    Powerful Essays
  • Good Essays

    AUTOMATIC SPROCKET

    • 596 Words
    • 3 Pages

    AUTOMATIC SPROCKET SIDE STAND RETRIEVAL ABSTRACT: in modern developing world, automobile plays important role especially two-wheeler i.e. (motorcycle & bicycle) plays a major role. Even though they are helpful there are some sad events like accidents due to carelessness of riders. Major accidents occur due to forgetting of lifting the side stand. To rectify this problem many advance measure have taken, but they are useless. So as a by considering that…

    • 596 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Monetary policy as an output stabilizer Monetary and fiscal policy are therefore interdependent, and it is difficult to analyse the stabilizing role of monetary policy in isolation. One way of avoiding this complex interdependence is to think of monetary policy as 'independent' in the short to medium run, but constrained by or constraining the fiscal deficit in the long run. This procedure also has the merit that monetary stabilization policy - to which we turn next - can be thought about separately…

    • 2156 Words
    • 9 Pages
    Powerful Essays