Monday, February 15, 2010

Automatic Stabilizers

Summary: Fiscal policy.

When the economy dips into a recession, workers lose their jobs and government tax revenues fall. Unemployment benefits automatically kick in to offset some of the loss in spending. During a boom, progressive taxes take more of a workers check so inflationary flames aren't fueled. Usually, fiscal policy takes government approval and is subject to lags. Automatic stabilizers take both the politics and lags out of the business cycle. Which below are automatic stabilizers and which are discretionary?

1. Government spending for a tank. 2. Transfer payments increase during a recession. 3. An increase in corporate income taxes. 4. Progressive income taxes. 5. Unemployment benefits.

My answers: 1 and 3 are discretionary.

About the Author: Mike Fladlien is an AP Economics teacher from Muscatine High School in Muscatine, IA. He is an author, and also publishes the Mikeroeconomics and iMacroeconomics VB blogs.


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