![]() How Automatic Stabilizers Impact Aggregate Demandĭuring an economic boom, automatic stabilizers enable the government to cool off expansion and even combat inflation. When an individual becomes unemployed, they need to file a claim and receive their transfer payments. It means that fewer people are filing claims for unemployment benefits, and thus, the transfer payments made by the government as part of unemployment insurance also decrease. Similarly, when the economy is an expansionary phase, there is a low level of unemployment. ![]() How Unemployment Insurance Stabilize Economic Cycles The tax bracket assigned to an individual is directly tied to their income level. For example, under the progressive taxation regime, as incomes increase, the share of income that must be paid in the form of taxes also increases.Īs incomes fall, the tax bracket of the taxpayer changes, which means that the share of income they must pay in the form of taxes also decreases. During a period of drastic growth and high-income levels, i.e., an economic boom, they take out money from the economy. How Progressive Taxation Stabilizes Economic CyclesĪutomatic stabilizers achieve a counter-cyclical fiscal policy by their normal functioning. It is different from a pro-cyclical fiscal policy, which prescribes that a government should follow austerity measures during an economic bust and vice versa. It means that the government must intervene to combat volatility during business cycles by increasing spending during an economic downturn. Keynesian economics prescribes that the government follows counter-cyclical spending.
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