1. Automatic Stabilizers

2. Discretionary Fiscal Policy in Practice
Time Lags
Recognition Time Lag
The time required to gather information about the current state of the economy- “ID the problem”
Action Time Lag
The time required between recognizing an economic problem and putting policy into effect
Political debate delays putting policy into effect
Short for monetary policy
Long for fiscal policy
Effect Time Lag
The time it takes for a fiscal policy to affect the economy

3. Automatic Stabilizers
Discretionary fiscal policy is a deliberate change in government spending and taxation to achieve economic goals.
Automatic Stabilizers effect the economy without government action

4. Automatic Stabilizers
Changes in government spending and taxation that occur automatically without deliberate action of Congress
Examples
The progressive income tax
Unemployment compensation

5. Progressive Income Tax as an Automatic Stabilizer
During a Recession- jobs lost/wages down
Income tax being paid but at a lower marginal tax rate because people making less money. As a result of the progressive tax system, disposable income doesn’t fall as drastically because your income is less. In other words, the individual isn’t hurt as much because of the progressive (marginal) tax.

6. Progressive Income Tax as an Automatic Stabilizer
During an Overheated Economy- employment up, wages up
Disposable income does not go up as rapidly as their gross income because of the progressive income tax. Taxes rising at a greater rate. More taxes will slow down the overheated economy. In this situation, progressive tax tends to stabilize any drastic, abrupt increases in the economy.

7. Unemployment Insurance as an Automatic Stabilizer
During a Recession- Unemployment insurance(gov’t transfer) tends to alleviate the severity of a recession by giving individuals some disposable income.

8. Automatic Stabilizers
The automatic
changes tend to drive
the economy back
toward its full-
employment output
level
Government
transfers
Tax
revenues Y2
Budget
deficit Y1
Budget surplus
Government Transfers and
Tax Revenues Yf
Higher taxes/
and lower
unemployment
insurance tends
to slow overheated
economy. Result
budget surplus.
Lower taxes
and higher
Unemploy.
Insurance tends
To lessen effect of recession.
Real National Income per Year
($ trillions)