Question

How can fiscal policy instruments act as automatic stabilizers in the economy? What is their impact on the rate of unemployment?

Answer 1

Automatic stabilizers are a form of fiscal policy designed to offset economic activity fluctuations in a nation through its normal operation without additional, timely government or policymakers authorization. Progressively graduated corporate and personal income taxes and payment schemes such as unemployment insurance and welfare are the best-known automatic stabilisers. Automatic stabilisers are so-called because they serve to regulate economic cycles and are triggered automatically without further government action.

Automatic stabilizers may include the use of a progressive tax structure under which the share of income earned in taxes is higher when income is high and decreases when income drops due to recession, job losses, or investment failures. As an individual taxpayer receives higher salaries, for example, his additional income may be subject to higher tax rates based on the current tiered system. The taxpayer would stay in the lower tax brackets as determined by his earned income if the wages fall.

Similarly, unemployment insurance transfer payments, decline when the economy is in an expansionary phase as there are fewer unemployed people filing claims and rise when the economy is engulfed in recession and high unemployment is. When a person becomes unemployed in a way that makes him eligible for unemployment insurance, he only needs to file a claim for the benefit. Benefit sum offered