Explain the concept of an automatic fiscal stabilizer Give e

Explain the concept of an automatic fiscal stabilizer. Give examples.

Solution

An automatic fiscal stabilizer is programme which inevitably has a tendency to dampen economic cycle fluctuations in income, employment etc. with no direct intervention by the government. Examples of automatic fiscal stabilizer is progressive income tax which automatically reduces money supply as incomes and spending increase in boom times. Likewise, injection of extra money in the system by payment of unemployment benefits in recessionary times stimulates demand. In other words, automatic stabilizers are intended to compensate fluctuations in an economic activity with no direct government or policymaker’s intervention. Other examples of automatic stabilizers are corporate and personal taxes, and transfer systems.