Automatic stabilizers counteract the fluctuations in business cycle. These automatic stabilizers are fiscal policy instruments, such...

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Automatic stabilizers counteract the fluctuations in business cycle. These automatic stabilizers are fiscal policy instruments, such as progressivity of the tax system and welfare benefits. To see how this works, suppose the economy enters in the stage of contraction. People's income will start falling. A lower income means lower taxes (not just because income is low, but because the applicable tax percentage is also lower). The government will have to spend more on the welfare benefits as the unemployment rate will rise. This means as the economy enters the stage of corruption, government spending increases and revenue falls. This implies government will have to borrow or draw on its savings. This will inject money into the system, There by inducing the economy to get back on the track faster. Automatic stabilizers counteract the fluctuations in business cycle. These automatic stabilizers are fiscal policy instruments, such as progressivity of the tax system and welfare benefits. To see how this works, suppose the economy enters in the stage of contraction. People's income will start falling. A lower income means lower taxes (not just because income is low, but because the applicable tax percentage is also lower). The government will have to spend more on the welfare benefits as the unemployment rate will rise. This means as the economy enters the stage of corruption, government spending increases and revenue falls. This implies government will have to borrow or draw on its savings. This will inject money into the system, There by inducing the economy to get back on the track faster.

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