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3.9 Automatic Stabilizers

3 min readjanuary 3, 2023

J

Jeanne Stansak

Haseung Jun

Haseung Jun

J

Jeanne Stansak

Haseung Jun

Haseung Jun

are a type of fiscal policy that is already in place to offset the fluctuations of economic activity in our economy. They're like automatic breaks for the economy to prevent inflations to become hyperinflations. These include things like , , and .

are typically used to counter the effects of or recessions. For example, if an economy falls into a recession we see an increase in being given to help get the economy moving again and spending money which will ultimately cause an increase in aggregate demand.

Income Taxes and Antipoverty Programs

Income taxes (progressive) and antipoverty programs (Temporary Aid to Needy Families/TANF) are examples of during an or recession.

Recessionary Period

During a recession, less people are employed and less income is made for those unemployed families. If people have less money, they will spend less, worsening the economy. Programs such as TANF will then step in. When more people are unemployed, more people will qualify for TANF, and more people will receive money from the government. This will in turn, increase temporary "income" for the unemployed families, and they'll likely spend more. This will help the economy regain its strength with the help of increased spending.

When the economy is improved, fewer families will qualify for TANF, which will lead to the size of the program decreasing. Less families will receive aid through TANF, so that the government is not always spending money.

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-QXv1avdGXybl.png?alt=media&token=dd71af5a-4fb1-4233-a76e-2850c7ede304

Image Courtesy of DUG

Inflationary Period

When is rapidly increasing, income taxes will kick into effect. During , the problem is that too many people are spending way too much. The government's income taxes can soothe this boom a little. describe income taxes that tax more if that household earns more income. It's a way of taxing people depending on their income. For example, instead of taxing everyone by the same percentage, (these numbers are arbitrary) some people are taxes 40% if they earn more than 100K while those who earn less than 100K are only taxes 30%. Those who earn less than 50K could be taxes only 20%.

These taxes "forces" families to cut back on their spending if they are spending too much. In turn, this will slow down the economy a little by putting brakes on spending. This will then reduce the threat of and contribute to .

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-Wc3XPs6l1wLk.png?alt=media&token=4a5b0248-2e31-4f9f-94bd-e8bb8a204fca

Image Courtesy of Economics Help

Disclaimer

Keep in mind that do not prevent anything. Yes, it does help the economy overall, but it doesn't have the ability to completely prevent anything. Instead, they are built in to keep the from becoming too extreme. The is inevitable, but the automatic stabilizer will help make the troughs and peaks less extreme so that the economy runs smoothly. also lead to deficits during recessions and surpluses during .

Aside from TANF and , the government has many other programs that act as . Other governmental policies, institutions, agencies or social service programs that give (or take depending on the situation) payment are likely to act as during the .

Key Terms to Review (12)

Automatic stabilizers

: Automatic stabilizers are government policies or programs that automatically adjust to stabilize the economy during economic downturns or expansions, without the need for additional legislative action.

Budget Surplus

: A budget surplus occurs when government revenues (income) exceed government expenditures (spending), resulting in a positive balance.

Business cycle

: The business cycle refers to the fluctuations in economic activity that occur over time, including periods of expansion (economic growth) and contraction (recession).

Economic boom

: An economic boom refers to a period characterized by significant growth in economic activity such as increased production, high employment rates, rising incomes, and overall prosperity within an economy.

Gross Domestic Product (GDP)

: Gross Domestic Product (GDP) measures the total value of all final goods and services produced within a country's borders during a specific period (usually annually). It serves as an indicator of economic growth or contraction.

Inflation

: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising and the purchasing power of money is decreasing.

Negative supply shocks

: Negative supply shocks refer to unexpected events that cause a sudden decrease in the availability or increase in the cost of key inputs, leading to a decrease in aggregate supply and higher prices.

Progressive income taxes

: Progressive income taxes refer to a tax system where the tax rate increases as an individual's income rises. In this type of system, higher-income earners pay a larger percentage of their income in taxes compared to lower-income earners.

Tax Revenues

: Tax revenues are the funds collected by governments through taxes imposed on individuals, businesses, and other entities. These funds are used to finance public goods and services provided by the government.

Temporary Aid to Needy Families (TANF)

: TANF is a federal assistance program in the United States that provides temporary financial aid to low-income families. It aims to help families achieve self-sufficiency by promoting work, job preparation, and marriage.

Unemployment benefits

: Unemployment benefits are financial assistance provided by the government to individuals who have lost their jobs and are actively seeking employment. These benefits help support unemployed workers by providing them with a temporary income.

Welfare

: Welfare refers to various government programs and initiatives aimed at providing financial aid and support to low-income individuals and families. These programs typically include cash assistance, healthcare coverage, food stamps, and housing subsidies.

3.9 Automatic Stabilizers

3 min readjanuary 3, 2023

J

Jeanne Stansak

Haseung Jun

Haseung Jun

J

Jeanne Stansak

Haseung Jun

Haseung Jun

are a type of fiscal policy that is already in place to offset the fluctuations of economic activity in our economy. They're like automatic breaks for the economy to prevent inflations to become hyperinflations. These include things like , , and .

are typically used to counter the effects of or recessions. For example, if an economy falls into a recession we see an increase in being given to help get the economy moving again and spending money which will ultimately cause an increase in aggregate demand.

Income Taxes and Antipoverty Programs

Income taxes (progressive) and antipoverty programs (Temporary Aid to Needy Families/TANF) are examples of during an or recession.

Recessionary Period

During a recession, less people are employed and less income is made for those unemployed families. If people have less money, they will spend less, worsening the economy. Programs such as TANF will then step in. When more people are unemployed, more people will qualify for TANF, and more people will receive money from the government. This will in turn, increase temporary "income" for the unemployed families, and they'll likely spend more. This will help the economy regain its strength with the help of increased spending.

When the economy is improved, fewer families will qualify for TANF, which will lead to the size of the program decreasing. Less families will receive aid through TANF, so that the government is not always spending money.

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-QXv1avdGXybl.png?alt=media&token=dd71af5a-4fb1-4233-a76e-2850c7ede304

Image Courtesy of DUG

Inflationary Period

When is rapidly increasing, income taxes will kick into effect. During , the problem is that too many people are spending way too much. The government's income taxes can soothe this boom a little. describe income taxes that tax more if that household earns more income. It's a way of taxing people depending on their income. For example, instead of taxing everyone by the same percentage, (these numbers are arbitrary) some people are taxes 40% if they earn more than 100K while those who earn less than 100K are only taxes 30%. Those who earn less than 50K could be taxes only 20%.

These taxes "forces" families to cut back on their spending if they are spending too much. In turn, this will slow down the economy a little by putting brakes on spending. This will then reduce the threat of and contribute to .

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-Wc3XPs6l1wLk.png?alt=media&token=4a5b0248-2e31-4f9f-94bd-e8bb8a204fca

Image Courtesy of Economics Help

Disclaimer

Keep in mind that do not prevent anything. Yes, it does help the economy overall, but it doesn't have the ability to completely prevent anything. Instead, they are built in to keep the from becoming too extreme. The is inevitable, but the automatic stabilizer will help make the troughs and peaks less extreme so that the economy runs smoothly. also lead to deficits during recessions and surpluses during .

Aside from TANF and , the government has many other programs that act as . Other governmental policies, institutions, agencies or social service programs that give (or take depending on the situation) payment are likely to act as during the .

Key Terms to Review (12)

Automatic stabilizers

: Automatic stabilizers are government policies or programs that automatically adjust to stabilize the economy during economic downturns or expansions, without the need for additional legislative action.

Budget Surplus

: A budget surplus occurs when government revenues (income) exceed government expenditures (spending), resulting in a positive balance.

Business cycle

: The business cycle refers to the fluctuations in economic activity that occur over time, including periods of expansion (economic growth) and contraction (recession).

Economic boom

: An economic boom refers to a period characterized by significant growth in economic activity such as increased production, high employment rates, rising incomes, and overall prosperity within an economy.

Gross Domestic Product (GDP)

: Gross Domestic Product (GDP) measures the total value of all final goods and services produced within a country's borders during a specific period (usually annually). It serves as an indicator of economic growth or contraction.

Inflation

: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising and the purchasing power of money is decreasing.

Negative supply shocks

: Negative supply shocks refer to unexpected events that cause a sudden decrease in the availability or increase in the cost of key inputs, leading to a decrease in aggregate supply and higher prices.

Progressive income taxes

: Progressive income taxes refer to a tax system where the tax rate increases as an individual's income rises. In this type of system, higher-income earners pay a larger percentage of their income in taxes compared to lower-income earners.

Tax Revenues

: Tax revenues are the funds collected by governments through taxes imposed on individuals, businesses, and other entities. These funds are used to finance public goods and services provided by the government.

Temporary Aid to Needy Families (TANF)

: TANF is a federal assistance program in the United States that provides temporary financial aid to low-income families. It aims to help families achieve self-sufficiency by promoting work, job preparation, and marriage.

Unemployment benefits

: Unemployment benefits are financial assistance provided by the government to individuals who have lost their jobs and are actively seeking employment. These benefits help support unemployed workers by providing them with a temporary income.

Welfare

: Welfare refers to various government programs and initiatives aimed at providing financial aid and support to low-income individuals and families. These programs typically include cash assistance, healthcare coverage, food stamps, and housing subsidies.


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© 2024 Fiveable Inc. All rights reserved.

AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.