![]() ![]() 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. \)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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