If the economy slows down, incomes decrease, and people pay less money in taxes. Most industrialized countries’ tax systems are set up to tax higher-income individuals and corporations at higher rates. According to Keynesians, this increase in government spending stimulates the economy. When the economy turns down and farmers struggle, the government’s expenses on farmer subsidies automatically increase. According to Keynesians, this increase in government spending prevents the economy from a more severe slowdown compared to what would occur if no unemployment compensation existed. When the economy turns down, the government’s expense on unemployment compensation automatically increases as more people lose their jobs. Automatic stabilizers are expense and taxation items that are part of existing economic programs.Įxamples of automatic stabilizers include Automatic stabilizers, on the other hand, do not need government approval and take effect immediately.Īutomatic stabilizers are changes in government spending and taxation that do not need approval by Congress or the President. Because discretionary fiscal policy is subject to the lags discussed in the last section, its effectiveness is often criticized. Examples include increases in spending on roads, bridges, stadiums, and other public works. Discretionary Fiscal Policy Discretionary fiscal policy represents changes in government spending and taxation that need specific approval from Congress and the President.
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