Describe how automatic stabilizers on both the expenditure a

Describe how automatic stabilizers, on both the expenditure and revenue sides of the budget, respond during a period of inflation (excess AD).

Solution

Automatic stabilizer without specific new legislation increases budget deficit during recession and vice versa.

They enact countercyclical policy without the lags associated with legislative policy change.

Some of the examples are :

1. Corporates profit : Taxes on corporate profit goes up during the boom and vice versa

2. Progressive income tax period : this kind of taxation puts the people in higher tax bracket in the period of boom