Question

23. With reference to ‘Automatic Fiscal Stabilisers’ (AFS)

Define what you understand by the term Automatic Fiscal Stabilisers and provide an explanation as to how ‘Automatic Fiscal Stabilisers’ may work within the UK economy. Outline any problems that may arise when automatic stabilisers begin to take effect.

Answer 1

Answer) Automatic fiscal stabilizers as the name suggests are inbuilt fiscal policy measures that takes place when there is volatility in the economy and these measures act to control this volatility and fluctuations caused,for example if a period of recession happens,unemployment will increase,demand will get hampered,in that case government will have to give unemployment allowance,food stamps,stimulus in case pre defined benchmark levels are hit,these will try to stabilize the economy.Coming to UK,automatic fiscal stabilisers may not work at immediate levels owing to higher government spending and higher deficits,however once the economy starts fluctuating wildly,these benchmarks levels may kick in bringing some stability.In terms of problems with such stabilizers,first is as described above,these stabilizers may kick in very late,another problem is that they are simulated and situations may not be the same,reasons may not be the same and such triggers can turn out to be bad moves in cases where they are not needed.

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