This consumption-production-consumption cycle leads to the multiplier effect, resulting in an overall increase in national income greater than the initial incremental amount of spending. Because of the increased purchases and lower unemployment, people have more money to spend and increase their consumption. As a result, producers must increase their production, which requires firms to hire more workers. The increased funds received from the government by citizens allows them to increase their consumption. The multiplier effect occurs as a chain reaction. When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect. The fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it. What makes automatic stabilizers so effective in dampening economic fluctuations is the fiscal multiplier effect. Therefore, automatic stabilizers tend to reduce the size of the fluctuations in a country’s GDP. As spending decreases, aggregate demand decreases. Also, because fewer individuals need social services support during a boom, government spending also decreases. Because more people are earning wages during booms, the government can collect more taxes. Similarly, the budget deficit tends to decrease during booms, which pulls back on aggregate demand. The result is an increase in the federal deficit without Congress having to pass any specific law or act. The unemployed also pay less in taxes because they are not earning a wage, which in turn decreases government revenue. As a result more people file for unemployment and other welfare measures, which increases government spending and aggregate demand. When the country takes an economic downturn, more people become unemployed. Here is an example of how automatic stabilizers would work in a recession. This effect happens automatically depending on GDP and household income, without any explicit policy action by the government, and acts to reduce the severity of recessions. The size of the government budget deficit tends to increase when a country enters a recession, which tends to keep national income higher by maintaining aggregate demand. In macroeconomics, the concept of automatic stabilizers describes how modern government budget policies, particularly income taxes and welfare spending, act to dampen fluctuations in real GDP. Explain the role of automatic stabilizers in regulating economic fluctuations.Evaluating the Recent United States Stimulus Package.Arguments for and Against Balancing the Budget.Automatic Stabilizers and Discretionary Policy.Automatic Stabilizers Versus Discretionary Policy.
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