Rising transfer payments and falling tax collections helped cushion households from the impact of the recession and kept real GDP from falling as much as it would have otherwise.Īutomatic stabilizers have emerged as key elements of fiscal policy. Real disposable personal income thus fell by only 0.9% during the 2001 recession, a much smaller percentage than the reduction in real GDP. Furthermore, the reduction in incomes increased transfer payment spending, boosting disposable personal income further. The reduction in economic activity automatically reduced tax payments, reducing the impact of the downturn on disposable personal income. Real GDP fell 1.6% from the peak to the trough of that recession. To see how automatic stabilizers work, consider the decline in real GDP that occurred during the recession of 1990–1991. Automatic stabilizers tend to increase GDP when it is falling and reduce GDP when it is rising. As incomes fall, people pay less in income taxes.Īny government program that tends to reduce fluctuations in GDP automatically is called an automatic stabilizer Any government program that tends to reduce fluctuations in GDP automatically. Because more people become eligible for income supplements when income is falling, transfer payments reduce the effect of a change in real GDP on disposable personal income and thus help to insulate households from the impact of the change. All were designed to stimulate aggregate demand and close recessionary gaps.Ĭertain government expenditure and taxation policies tend to insulate individuals from the impact of shocks to the economy. The 2009 fiscal stimulus bill passed in the first months of the administration of Barack Obama included both tax cuts and spending increases. Bush administrations and the increase in government purchases proposed by President Clinton in 1993. Four examples of discretionary fiscal policy choices were the tax cuts introduced by the Kennedy, Reagan, and George W. Then we will look at how discretionary fiscal policies work. Some tax and expenditure programs change automatically with the level of economic activity. Like monetary policy, it can be used in an effort to close a recessionary or an inflationary gap. Explain and illustrate graphically how discretionary fiscal policy works and compare the changes in aggregate demand that result from changes in government purchases, income taxes, and transfer payments.įiscal policy-the use of government expenditures and taxes to influence the level of economic activity-is the government counterpart to monetary policy.Define automatic stabilizers and explain how they work.zip file containing this book to use offline, simply click here. You can browse or download additional books there. More information is available on this project's attribution page.įor more information on the source of this book, or why it is available for free, please see the project's home page. Additionally, per the publisher's request, their name has been removed in some passages. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Normally, the author and publisher would be credited here. This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book is licensed under a Creative Commons by-nc-sa 3.0 license.
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