Answer to Question #90086 in Macroeconomics for marwan essam

Question

Given the national income. Plotted on the horizontal axis and the GDP deflator on the vertical one. Explain verbally and graphically, how to use the fiscal policy-as an automatic adjustment to reach the potential level of GDP along the LRAS curve

Answer 1

Automatic stabilizers are ongoing government policies that automatically adjust tax rates and transfer payments in a manner that is intended to stabilize incomes, consumption, and business spending over the business cycle.

So, if there is an economic downturn or high level of inflation, and the real GDP is below or above the potential GDP, then governments often back up automatic stabilizers with one-time or temporary stimulus policies such as setting progressive tax system or making more or less transfer payments to cut the recessional or inflationary gap.