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Automatic Stabilizer

Definition

Automatic stabilizers are government policies or programs that automatically adjust spending and taxes in response to changes in the economy, with the goal of stabilizing aggregate demand and reducing fluctuations in economic activity.

Analogy

Think of automatic stabilizers as a self-adjusting thermostat for the economy. Just like a thermostat automatically adjusts the temperature to keep your house comfortable, automatic stabilizers work behind the scenes to keep the economy from getting too hot or too cold.

Related terms

Discretionary Fiscal Policy: This refers to deliberate changes in government spending or taxation by policymakers, which are not automatic but rather based on specific decisions made at a given time.

Progressive Tax System: A progressive tax system is one where individuals with higher incomes pay a higher percentage of their income in taxes compared to those with lower incomes.

Unemployment Insurance: Unemployment insurance is a program that provides financial assistance to workers who have lost their jobs involuntarily. It is an example of an automatic stabilizer because it increases government spending during economic downturns when job losses increase.