Macroeconomics for Dummies—UK Edition by Manzur Rashid & Peter Antonioni

Author:Manzur Rashid & Peter Antonioni
Language: eng
Format: epub
ISBN: 9781119026686
Publisher: Wiley
Published: 2015-10-14T00:00:00+00:00

Automatic stabilisers

Automatic stabilisers, as their name suggests, act to stabilise the economy by bringing output back towards its natural level. Furthermore, this process happens automatically, that is, without any change in fiscal policy by policy makers.

To see how this works, consider that output is higher than its natural level – for example, after a positive AD shock. Higher output (in the short run) means that people are earning more income and firms are making more profits, which will automatically increase the amount of tax that the government collects. This puts the brakes on the economy – in much the same way as would contractionary fiscal policy; however, the big difference is that it happens automatically. Policy makers don’t actually have to do anything, the taxes just pour in!

The stabilisation process works in the other direction too. Consider the case where output is less than its natural level, perhaps due to a negative AD shock. This situation leads to a fall in output and an increase in unemployment. But it also reduces the amount of tax revenue that the government collects. This automatically boosts the economy, much like expansionary fiscal policy would boost the economy, except that, very conveniently, it happens automatically!

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