Answer to Question #224352 in Macroeconomics for Anum naz

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

Automatic stabilizers are a type of fiscal policy that happen automatically and tend to offset fluctuation in economic activities without direct intervention from policy makers. They are structures and Government spending programs that lead to larger budget deficits during expansions.

For example, 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.