What is the difference between discretionary fiscal policy and automatic stabilizers? Be careful to define each...

What is the difference between discretionary fiscal policy and automatic stabilizers? Be careful to define each carefully. What are the advantages and disadvantages of each?

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Expert Solution

Discretionary fiscal policy refers to the government policy that is implemented by replacing the existing policy due to a change in the market scenario, and it is a planned policy. On the other hand, automatic stabilizer refers to the process that immediately changes the market system without the policymaker's direct intervention for any fluctuation in the market scenario, and it is not a planned policy.

The main difference between these two policies is the time taken by both the policies for their implementation. Discretionary fiscal policy needs some time to get implemented as it follows the procedure of implementing laws and policies due to which there is a need for approval for such policies. At the same time, the automatic stabilizer is the policy that is implemented in a shorter time period following the aggregate demand change. It does not need an approval process, as policymakers have no direct invention in such policies.

Advantages of Discretionary policy are:

· It takes approval of all the three government authorities, which makes it a more reliable policy.

· It takes the idea from opposition parties also so that effective and unbiased policy can be chosen.

Disadvantages of Discretionary policy are:

· This policy may lead to crowding out the situation in the market.

· This policy is time-consuming that makes it less effective in the market.

Advantages of the automatic stabilizer are:

· It does not take time to get implemented, making it effective to stabilize the situation in the short-run.

· It protects the economy from a high volume of fluctuation in the market behavior that may positively affect the growth of an economy.

Disadvantages of the automatic stabilizer are:

· It is not a planned policy due to which it may negatively affect the market and the economy.

· An automatic stabilizer emphasizes only the aggregate demand due to which other economic factors can be badly affected by this policy.

Rahul Sunny answered 1 year ago

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