Answer to Question #223370 in Macroeconomics for Fariha

Question

Why do we call mechanisms such as proportional income taxes and the welfare system auto-
matic stabilizers ? Choose one of these mechanisms and explain carefully how and why it
affects fluctuations in output.

Answer 1

1.

Such mechanisms are called automatic

stabilizers because they act in such a way that the economic cycles are stabilized and they are automatically triggered with no additional government action.

2.

For instance, income tax collections decrease along with income and profit in times of recessions.

This is because taxes have a stabilizing effect and they tend to change automatically with change in economic growth.