Answer to Question #275580 in Macroeconomics for Sakeena

Question

Q.2 why do we call mechanisms such as such as proportional income tax and welfare system automatic stabilizers? Choose any one of them and explain carefully how and why it affects fluctuations in output

Answer 1

1. Mechanisms such as proportional income taxes and the welfare system are called automatic stabilizers since they act to stabilize economic cycles and are automatically activated without additional government intervention. It is meant to stabilize incomes, consumption levels, and business expenditure.

 2. 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.