Definition
Automatic Stabilizers are fiscal mechanisms built into government budgets that automatically adjust spending and taxes to stabilize the economy. Examples include progressive income taxes, which reduce tax burdens during downturns, and unemployment benefits, which increase support when joblessness rises.
Why It Matters
Automatic stabilizers help smooth out economic fluctuations without new legislation or direct intervention. They reduce the severity of recessions and dampen inflation during booms by automatically increasing or decreasing net government spending.
Example
During a recession, more workers claim unemployment benefits, which injects money into the economy and supports demand. Conversely, during economic growth, higher tax revenues reduce disposable income, helping to cool off an overheated economy.