3.9: Automatic Stabilizers

Question 1

How does the Income Tax Brackets tax system lessen the effects of a recession and help stabilize the economy?

Answer 1

When the GDP is down, the tax burden on consumers is low, promoting consumption and increasing AD.

When GDP is up, more tax burden on consumers, discouraging consumption and decreasing AD

the more progressive the tax system, the greater the economy’s built-in stability.

Question 2

Transfer payments are an example of what?

Answer 2

Non-discretionary fiscal policy, act to counter cyclically to stabilize the economy

1. When GDP is down, unemployment is higher, and more benefits will pay out. This helps to increase AD.
2. When GDP is up, unemployment is low and fewer benefits will be paid out decreasing AD