automatic stabilizer

Examples of automatic stabilizer in the following topics:

• Automatic Stabilizers Versus Discretionary Policy

  • Automatic stabilizers and discretionary policy differ in terms of timing of implementation and what each approach sets out to achieve.
  • In fiscal policy, there are two different approaches to stabilizing the economy: automatic stabilizers and discretionary policy.
  • On the other hand, automatic stabilizers are limited in that they focus on managing the aggregate demand of a country.
  • For example, if an economy is going through a recession because its workers lack a certain set of skills, automatic stabilizers cannot address that problem.
  • Finally, automatic stabilizers, such as the tax code and social service agencies, exist prior to an economic fluctuation.

• Automatic Stabilizers

  • Automatic stabilizers are modern government budget policies that act to dampen fluctuations in real GDP.
  • Here is an example of how automatic stabilizers would work in a recession.
  • Therefore, automatic stabilizers tend to reduce the size of the fluctuations in a country's GDP.
  • What makes automatic stabilizers so effective in dampening economic fluctuations is the fiscal multiplier effect.
  • Taxes are a part of the automatic stabilizers a country uses to minimize fluctuations in their real GDP.

• Difficulty in Getting the Timing Right

  • A nation can respond to economic fluctuations through automatic stabilizers or through discretionary policy.
  • With regards to automatic stabilizers, timing is not an issue.
  • Automatic stabilizers are designed to respond to evolving economic conditions without anyone taking action.

• Effect of a Government Budget Deficit on Investment and Equilibrium

  • This type of budget deficit serves as a stabilizer, insulating individuals from the effects of the business cycle without any specific legislation or other intervention.
  • Unlike the cyclical budget deficit, a structural deficit is the result of discretionary, not automatic, fiscal policy.
  • While automatic stabilizers don't actually shift the aggregate demand curve (because transfer payments and taxes are already built into aggregate demand), discretionary fiscal policy can shift the aggregate demand curve.

• Exchange Rate Policy Choices

  • This puts the entire economy's financial sector stability in danger.
  • Under fixed exchange rates, this automatic re-balancing does not occur.
  • This is because sudden depreciation in their currency value poses a significant threat to the stability of their economies.

• Managed Float

  • Floating exchange rates automatically adjust to economic circumstances and allow a country to dampen the impact of shocks and foreign business cycles.
  • A floating exchange rate also allows the country's monetary policy to be freed up to pursue other goals, such as stabilizing the country's employment or prices.

• Monetary Policy and Fiscal Stabilization

  • Eisenhower (1953-1961), for instance, the Fed emphasized price stability and restriction of monetary growth, while under more liberal presidents in the 1960s, it stressed full employment and economic growth.
  • The growing importance of monetary policy and the diminishing role played by fiscal policy in economic stabilization efforts may reflect both political and economic realities.

• The Structure and Function of Other Banks

  • In contrast with the Federal Reserve, the ECB has the primary objective of maintaining price stability within the Eurozone, but is not charged with regulating unemployment or economic output.
  • The primary goals of the Bank of England are to maintain price stability and support the economic policies of the government.
  • The recently-established Financial Policy Committee is responsible for regulating the UK's financial sector in order to maintain financial stability.
  • It is responsible for making and implementing monetary policy for safeguarding the overall financial stability and provision of financial services.
  • It is divided into 18 functional departments that oversee such issues as monetary policy, financial stability, anti-money laundering, and legal affairs.

• Volcker Disinflation

  • Paul Volcker, the 12th Chairman of the Federal Reserve, became known for lowering the inflation rate and achieving price stability.
  • Volcker's tenure as the chairman of the Federal Reserve resulted in sound monetary and fiscal integrity that achieved the goal of price stability.

• Setting and Achieving the Interest Rate Target

  • The Federal Reserve (Fed) has an ability to directly influence economic growth and stability through the use of monetary policy.
  • The Federal Reserve (Fed) has an ability to directly influence economic growth and stability through the use of monetary policy.