Economics Essay Example: Automatic Fiscal Stabilizers

Mankiw (2015, p. 764), states that automatic stabilizers are the changes in the fiscal policy that affect demand for goods and services in an economy when it (the economy) goes into recession without the intervention of the policymakers. Alternatively, Investopedia (n.d.), states that automatic stabilizers are the economic policies and programs that offset any fluctuations in the economic activity of a country without the interference of the policymakers. Examples of economic stabilizers include the taxes remitted by both the corporate and the individuals, the transfer systems for example welfare and insurance to employees. These transfer systems are critical in stabilizing the GDP whenever there are shocks on the economy. When the AD curve shifts to the right and the GDP increases, the levels of income rises and the revenue to the government in form of taxes also increase. This reduces the number of those in need of government assistance which reduces the government benefits. The lower transfer payment by the government lowers the overall net tax incomes which dampen the real GDP, as an effect of the economic shock.

The simple multiplier [1/{1 MPC(1 t) m}] plays a critical role in stabilizing the real GDP (Mankiw, 2015, p. 758). For instance, when a recession reduces the demand for a countrys exports by $10 billion, the income for the country reduces as well as the spending of the consumers of the products of the country. If MPC is say with a multiplier of 4, then the fall of net export by $10 billion leads to a contraction in AD by $40 billion.

The aggregate demand and supply are vital in analyzing the changes in real GDP and level of prices. The AD curve inversely relates to price level and GDP. For example, increase in price increases money demand and the interest rates and investments, reduce export by making domestic goods less attractive to foreigners, and reduces savings as well. On the other hand, AS shows the costs of producing the GDP. When the input prices increase at fixed input prices, firms will have the urge to gain more profits. At lower GDP, resources are invested and output may increase. However, when GDP nearly reaches full employment, some resources face bottlenecks and costs start rising. Prices also rise to cover the increased production costs. The slope of AS curve increases as full employment is approached.

The size of the multiplier is inversely proportional to the size of the leakages; 1-MPC, t, and m such that when the leakages are larger, the multiplier is smaller and when the leakages are bigger, the multiplier is smaller. The smaller the region, the larger the leakage as a result of the imports and the smaller the multiplier.

Reference

Mankiw, G. (2015). Principles of Economics (7th ed.). United Kingdom: Cengage Learning.

Investopedia. (n.d.). Automatic Stabilizer. Investopedia. Retrieved November 11, 2017, from https://www.investopedia.com/terms/a/automaticstabilizer.asp.