Automatic Stabilizers

Automatic Stabilizers

• The most common automatic stabilizer is the tax system. As the economy goes in to an economic boom the government collects

  more

  ---

  in taxes and when the economy is in a recession the government collects

  less

  ---

  in taxes. This helps to

  reduce

  ---

  the size of the booms and recessions which

  decreases

  ---

  the need for fiscal policy (active stabilization).
• Another example of an automatic stabilizer is Employment insurance. When the economy goes in to a recession there are more people applying for Employment Insurance and social assistance benefits which causes government spending to automatically increase and help reduce the size of the recession.
• A flexible exchange rate can also be an automatic stabilizer. If our net exports fall this would cause our GDP (income) to

  fall

  ---

  . This would cause money demand to

  decrease

  ---

  and

  lower

  ---

  interest rates.
• Canadian assets would become

  less

  ---

  attractive and the Canadian dollar would

  depreciate

  ---

  causing net exports to

  increase

  ---

  and push GDP back up.