Which of The Following Is An Example of An Automatic Stabilizer?

Which of The Following Is An Example of An Automatic Stabilizer?

What are examples of automatic fiscal stabilizers?

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Automatic Stabilizer Meaning 

An automatic stabilizer is a type of fiscal policy aimed at reducing economic fluctuations based on normal operations.

They are called “automatic” stabilizers because the fiscal policies are triggered in the normal functioning of the economy and help stabilize economic fluctuations.

For example, welfare or unemployment insurance is triggered when a person loses a job or becomes unemployed.

The welfare and unemployment insurance mechanisms are triggered without any specific action required by the government or policymakers.

Automatic Stabilizer Purpose

The overall purpose and objective of automatic stabilizers are to protect against negative economic movements or even recessionary movements.

Conversely, when the economy goes into a significant expansion mode, the automatically stabilizing policies will set off the expansion and “cool off” the economy.

When changes in the economic and business cycle occur, stabilizing policies will result in:

• Money is taken out of the economy when the economy is expanding through higher taxes 
• Money is injected back into the economy when there are economic slowdowns through tax credits, tax refunds, and other government spending 

Which of The Following Is An Example of An Automatic Stabilizer?

The best example of automatic stabilizers are:

• Progressively increasing corporate income taxes
• Gradually increasing personal income taxes
• Unemployment insurance collected by employed workers
• Welfare paid to the unemployed 
• Tax credits offered when revenues decline 

Essentially, the result of automatic stabilizers is that overall government spending decreases in positive economic cycles and increases in negative business cycles.

Income tax 

For instance, when there is a rise in tax revenue to the government as a result of an increase in the gross domestic product (GDP), that’s a great example of an automatic stabilizer.

In this case, as individuals and companies earn more money, they will progressively pay a higher amount of personal and corporate taxes.

With more tax payments, the government’s tax revenue increases allowing it to stabilize other areas of the economy that need attention.

Government spend

Similarly, if the economic output goes down, the income tax collected will go down as well allowing the economic actors (companies and individuals) to have more cash on hand to cover their expenses.

With changes in the business cycle, government spending and taxes fluctuate.

In positive economic cycles, the government collects more taxes as companies and individuals earn a higher income (this takes money out of the economy to cool it off or stabilize it).

In negative economic cycles and recessions, individuals and companies pay less taxes and preserve more money to cover their spending.

Furthermore, the government offers more tax credits, tax refunds, and increases its overall spending in the economy (this puts money back into the economy to stimulate it).

Takeaways 

So, which of the following is the best example of an automatic stabilizer?

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Which of The Following Is An Example of An Automatic Stabilizer

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