Th4.5: Automatic Stabilisers and Discretionary Fiscal Policy

Question 1

What are automatic stablisers?

Answer 1

mechanisms which reduce the impact of changes in the economy on national income - government spending and taxation are automatic stabilisers

Question 2

What affect do benefits have in a recession?

Answer 2

benefits increase as more people are unemployed and so the benefits are a stabiliser as it means that the overall fall in AD is reduced, preventing too much change in the economy

Question 3

What affect does tax have during a boom?

Answer 3

tax increases as people have more jobs and higher incomes, and this tax reduces disposable income so decreases consumption and AD, meaning demand doesn’t grow too high

Question 4

What can automatic stabilisers not do?

Answer 4

cannot prevent fluctuations - they simply reduce the size of the problem and there can be negative aspects

Question 5

What are the negative aspects of benefits?

Answer 5

may act as a disincentive to work and lead to higher unemployment

Question 6

What are the negative aspects of high tax?

Answer 6

decrease the incentive to work hard

Question 7

What is discretionary fiscal policy?

Answer 7

the deliberate manipulation of government expenditure and taxes to influence the economy - expansionary and deflationary policies