Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
1Activity
0 of .
Results for:
No results containing your search query
P. 1
Automatic Stabilisers

Automatic Stabilisers

Ratings: (0)|Views: 107|Likes:
Published by Learner84

More info:

Published by: Learner84 on Nov 20, 2009
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as DOC, PDF, TXT or read online from Scribd
See more
See less

05/22/2010

pdf

text

original

 
Automatic Stabilisers.
automatic stabilisers
work as a tool todampen fluctuations inreal GDPwithout any explicit policy actionby the government. It is a government program that changesautomatically depending on GDP and a person’s income,
andacts as anegative feedbackloop on GDP.The size of the governmentdeficittends to increase as a countryentersrecession, which helps keep national income high throughthemultiplier .Furthermore,importsoften tend to decrease in a recession,meaning more of the national income is spent at home rather thanabroad. This also helps stabilise the economy.
Induced taxes
Governmenttaxrevenue tends to fall as a proportion of nationalincome during recessions.This occurs because of the way tax systems are generallyconstructed.
Income taxis generally at least somewhatprogressive. If an individual's income rises, then their average tax rateincreases.This means that as incomes fall, households pay less as aproportion of their income in direct taxation.
Corporation taxis generally based onprofits, rather  thanturnover . In a recession profits tend to fall much faster thanturnover. Therefore, a corporation pays much less tax whilehaving only slightly less economic activity.If national income rises, by contrast, then both households andcorporations end up paying higher proportions of their income intax.This means that in an economic boom tax revenue is higher and ina recession tax revenue lower; not only in absolute terms but as aproportion of national income.
 
Other forms of tax do not exhibit these effects, because they areroughly proportionate to income (e.g. taxes on consumptionlikesales taxor value added tax, or they bear no relation to income (e.g.poll taxor property tax).
Transfer payments
Most governments also payunemploymentandwelfare benefits. Generally speaking, the number of unemployed people and thoseon low incomes who are entitled to other benefits increases in arecession and decreases in a boom.This means that
government expenditure increases automatically in recessions and decreases automatically in a boom
in absoluteterms. Since the trend of output is to increase in booms anddecrease in recessions, expenditure is expected to increase as ashare of income in recessions and decrease as a share of incomein bo
oms.
When stabilisers don't work
There is broad consensus amongst economists that the automaticstabilisers often exist and function in the short term.However, the automatic stabilisers model does notincorporaterational expectationsor other microfoundations. No part of economics is in the final analysis a mechanistic process andthe existence of the stabilisers can easily be overshadowed byother changes to policy, expectations or markets.
Automatic stabilisers incorporated into the expendituremultiplier 
This section incorporates automatic stabilisation into abroadlyKeynesian multiplier model.
 
MPC
T
= Induced taxes
MPI
= Marginal Propensity to ImportHolding all other things constant,ceteris paribus, the greater thelevel of taxes, or the greater the MPI then the value of thismultiplier will drop. For example, lets assume that:
MPC 
= 0.8
= 0
MPI 
= 0.2Here we have an economy with zero marginal taxes and zerotransfer payments. If these figures were substituted into themultiplier formula, the resulting figure would be
2.5
. This figurewould give us the instance where a (for instance) $1 billion changein expenditure would lead to a $2.5 billion change in equilibriumreal GDP.Lets now take an economy where there are positivetaxes (an increase from 0 to 0.2), while the MPC andMPI remain the same:
MPC 
= 0.8
= 0.2
MPI 
= 0.2If these figures were now substituted into the multiplier formula, theresulting figure would be
1.79
. This figure would give us theinstance where, again, a $1 billion change in expenditure wouldnow lead to only a $1.79 billion change in equilibrium real GDP.This example shows us how the multiplier is lessened by theexistence of an automatic stabiliser, and thus helping to lessen thefluctuations in real GDP as a result from changes in expenditure.Not only does this example work with changes in
T
, it would also

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->