I am not understand this question at all that was asked by our instructor. We need to know for mid term.?

Question

Explain how typically the automatic stabilizer works. Use one automatic stabilizer to illustrate this.

What are you kidding me, what in the world, I have read all the material and this is not in there, does anyone know what this would be?

Answer 1

If the government increases spending or collects less in taxes when consumers are seeing their incomes decline due to recession. or the reverse during booms it smooths out fluctuations in the economy (stabilizes). Income taxes, payroll taxes, unemployment insurance, welfare, all act to decrease taxes or increase expenditures during recessions, and take effect with out any change in law, that is automatic.

Answer 2

i agree with the answers above.

automatic stabilizers help to move th economy back into equilibrium where there is full employment.

lets say for example:

There is a huge decline in investment, this results in AD shifting downwards. To bring it back into equilibrium, the government can either reduce taxes or increase government spending to stimulate the economy and bring it back into equilibrium.

Answer 3

As they relate to the efforts of a government to maintain a balance in the internal economy, automatic stabilizers are often employed. An automatic stabilizer is some element of the economy that can help to counter some activity of the business cycle that threatens to bring the national economy off balance in some manner. Here are some examples of how automatic stabilizers work to keep the national economy of a company on an even keel.