Question

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

Answer1: Automatic fiscal stabilizer: It is a type of Fiscal policy, govt. use this mechanism in order to increase or decrease taxes when the economy slows. for eg. during recession automatic stabilizer can ease household financial stress by decreasing their tax bills, that help household families to come out of their financial difficulties.

How automatic stabilizers may work within the UK economy: In the UK economy if there is a situation of recession they apply the expansionary fiscal policy in which govt. spending will increase, lower taxes are done. the automatic fiscal stabilizer also applied during the recession period in this they take less income tax, less VAT, and start spending more on welfare benefits such as unemployment. this automatic stabilizer help minimize fluctuations in demand.

The problem that may arise when automatic stabilizers begin to take effect:

• govt. borrowing will increase during times of recession which in turn limits the fund available for other private sectors like research, infrastructure, investment, and other factor that would stimulate economic growth.