Explain the role of built-in stabilizers in preventing recession and excessive inflation?
i believe that "built-in stabilizers" is the same as "automatic stabilizers", rite? automatic stabilizer falls under fiscal policy but the govt doesnt really has to do anything at any 1 time.
automatic stabilzers only work in a country with 'progressive tax system' + 'strong welfare system'.
progressive tax system is when as u earn more, u have to pay a higher rate of tax. note the word 'rate' of tax.
strong welfare system refers to the unemployment benefits.
in recession, more people is out of work, rite? therefore the unemployment benefits would increase.
also, the people's wage would fall, therefore they only have to pay a low tax rate.
these 2 things should boost consumption (C) and govt spending (G). from the AD equation :
AD = C + I + G + (X-M), increase in C and G would increase AD, thus we will climb out of recession.
vice versa, during boom, G falls, many people pay higher tax rate, so C falls. AD falls, we are creating a very tiny, small, recession so that the prices would not go up (inflation is prevented).
there, that should be a brief explanation bout it <-- not really that brief, huh? haha..
I remember these as being the interest rate controls both big upswings and downswings. Taxes are less a powerful force and interest rates falling that a long time to get the market moving again once a recession is started. other stabilizers are, there is money to be made others will get into the business to keep inflation down. Unemployment stabilizes the economy in slowdowns. I think you get the point
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