Summary AQA A-level Economics: Automatic Stabilizers (Fiscal Policy)Notes

Automatic Stabilizers

Automatic Stabilizers: Fiscal policy tools to influence GDP and counter
fluctuations in the Economic Cycle.

Discretionary Fiscal Policy: Expansionary fiscal Policy on top Of Automatic
Stabilizers.


Automatic Stabilizers (Tools):
1) Progressive Income Tax System

2) Welfare Benefits - Unemployment Benefits

Boom (Cushion Demand)
1) Income Rise - workers pushed into higher income tax bands -
Increase average rate of tax(amount of income tax paid as proportion
of income) - slow down consumption - Slow down AD - Demand pull
inflation doesn't spiral out of control.
2) Unemployment Low - Gov spending on benefits is low - helps reduce
G - cushion demand.
Rescission (Support Output):
1) Income fall - workers in lower tax bands - reduce average rate of
Income tax paid - prevents large decreases in consumption -
supports output.
2) Unemployment is Higher - Gov spending on Benefits rises - increase
AD - prevent Deep recession.

If Automatic Stabilizers work - there are fewer deviations from the
economic cycle (green line).
If Automatic Stabilizers are strong - less need for discretionary fiscal policy
to get out of RECESSION