Unit 3: Automatic or Built-In Satabilizers

Automatic or Built-In Stabilizers

• Anything that increases the government’s budget deficit during a recession and increases its budget  surplus during inflation WITHOUT REQUIRING EXPLICIT ACTION BY POLICY MAKERS
• Economic Importance:
• Taxes reduce spending and aggregate demand
• Reductions in spending are desirable when the economy is moving toward inflation
• Increases in spending are desirable when the economy is heading toward recession.

• Progressive Tax System
• Average tax rate (tax revenue/GDP) rises with GDP
• Proportional Tax System
• Average tax rate remains constant as GDP changes
• Regressive Tax System
• Average tax rate falls with GDP
• The more progressive the tax system, the greater the economy’s built-in stability.