Answer to Question #257355 in Macroeconomics for Rohit kaushik

Question

Do we call mechanism such as proportional income taxes and the welfare system automatic stabilizer choose one of these mechanism and explain carefully how and why it affect fluctuation in output

Answer 1

Yes, mechanisms such as proportional income taxes and the welfare system are called automatic stabilizers because they act to stabilize the economic cycles and are brought about automatically without further intervention by the government. They neutralize economic fluctuations in the economy through their usual operation without intervention by policy makers or the government.

For instance, taxes have a stabilizing effect because they move automatically with economic growth since income tax collections decrease during recessions together with income and profit. When incomes are high, the share of the income generated in taxes is also high and is lower when the income declines.