Answer to Question #323061 in Macroeconomics for Shaaan

Question

Why do we call mechanisms such as proportional income taxes and the welfare system auto-matic stabilizers ? Choose one of these mechanisms and explain carefully how and why it affects fluctuations in output

Answer 1

Mechanisms including proportional income taxes and the welfare system are referred to as automatic stabilizers since they work to stabilize economic cycles and are triggered automatically without additional government action. Automatic stabilizers are a type of financial policy designed to neutralize fluctuations in a country's economic activity through their normal operation without direct participation by the government or policymakers. For instance, proportional income tax is a structure under which the share of income generated taxes is higher when incomes are high and lower when incomes fall due to unemployment, weak investments, or recessions.