When output falls:
- Tax revenues fall automatically decreases:
- Incomes and revenues decrease when AD decreases
- At lower incomes levels, households pay lower tax rates
- Government spending increases automatically:
- More households receive government welfare payments.
- More workers receive government unemployment benefits
When output increases:
- Tax revenues increase because households incomes and firms revenues increase. Some households move up to higher tax brackets and pay higher rates.
- Government spending decreases because fewer households depend on government support.
Automatic Stabilizers
Fiscal Policy and Long-run Economic Growth
Recall from the previous unit that Economic Growth, defined as an increase in total output over time, is only possible in the long-run if both AD and AS increase. Therefore, demand-side fiscal policies alone cannot produce economic growth. However, some fiscal policies can have positive supply-side effect as well.
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