On the tax side, a rise in aggregate demand means that workers and firms throughout the economy earn more. To some extent, both changes happen automatically. The policy prescription in this setting would be a dose of contractionary fiscal policy, implemented through some combination of higher taxes and lower spending. This situation will increase inflationary pressure in the economy. Counterbalancing Recession and BoomĬonsider first the situation where aggregate demand has risen sharply, causing the equilibrium to occur at a level of output above potential GDP. Changes in tax and spending levels can also occur automatically, due to automatic stabilizers, such as unemployment insurance and food stamps, which are programs that are already laws that stimulate aggregate demand in a recession and hold down aggregate demand in a potentially inflationary boom. The stimulus package of 2009 is an example. Federal fiscal policies include discretionary fiscal policy, when the government passes a new law that explicitly changes tax or spending levels. The millions of unemployed in 2008–2009 could collect unemployment insurance benefits to replace some of their salaries. Understand how a standardized employment budget can be used to identify automatic stabilizers.Identify examples of automatic stabilizers.Describe how discretionary fiscal policy can be used by the federal government to stabilize the economy.By the end of this section, you will be able to:

Automatic stabilizers fiscal policy