![]() When we use the budget function to show fiscal policy changes, we can also consider more complex programs that change both the slope of the function and the structural balance. A larger net tax rate would mean larger automatic changes in the budget balance in response to changes in income and more automatic stabilization. The effect of the change in the budget balance is stabilizing. These changes in Y for example, down to Y 1 or up to Y 2, cause movements along the budget function and a change in the budget balance, as shown in Figure 7.8. Any fluctuations in private sector autonomous expenditures cause changes in income Y. ![]() It comes from the slope of the budget function, the net tax rate t 0 in this case. Automatic stabilization is a part of all these programs. Figure 7.8 illustrates discretionary policy as shifting the BB line up to BB 1, in the case of restraint or austerity, or down to BB 2 to provide fiscal stimulus. A change in discretionary policy would change the entire budget line. ![]() Discretionary stabilization shifts the budget function as a result of changes in government expenditure or taxes.ĭiscretionary fiscal policy sets both the position and slope of the budget function. Those changes usually come from discretionary fiscal policy.Īutomatic stabilization comes from changes in the budget balance along the BB 0 line as Y fluctuates between Y 1 and Y 2. There is no automatic change in autonomous government expenditure or tax rates. They do not offset those autonomous expenditure disturbances. However, automatic stabilizers only serve to moderate the fluctuations in real GDP caused by fluctuations in autonomous expenditure. Conversely, in a boom, net tax revenues rise and disposable income rises by less than the rise in national income, which helps dampen the boom. The slope of the aggregate expenditure function ( c(1– t)– m) is lower, and so is the multiplier. Both effects mean that disposable income changes by less than the change in national income. At given net tax rates, a fall in national income, output, and employment raises payments of unemployment benefits and reduces tax collections. Income taxes and transfers, such as unemployment benefits, are important automatic stabilizers. \( \newcommand\)Īutomatic stabilizers: tax and transfer programs that reduce the size of the multiplier and the effects of transitory fluctuations in autonomous expenditures on equilibrium GDP.
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