Economics Automatic stabilisers?

Question

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

Answer 1

An economic policy or program that increases or decreases automatically to offset the current economic trend without government assistance.

An example of such a policy would be unemployment insurance.

Answer 2

Automatic stabilizers in economy (macro-economy) are specific tools which are working opposite to business cycle fluctuations helping to stabilize economy thus keeping it closer to potential level of output.

Some of automatic stabilizers are:

Specific taxes

Transfer payments

Import

Mechanics is simple - income taxes are falling by absolute value during recessions thus lowering load on consumers, transfer payments helps to protect aggregate demand from falling too deep during recessions. If economy is booming then income taxes reduces disposable income, thus aggregate demand is lower.

http://en.wikipedia.org/wiki/Automatic_s...