Question

How do built-in stabilizers work to reduce rises and falls in the level of nominal GDP?

Answer 1

In economics, built in stabilizers are the programs and policies primarily designed with an aim to offset fluctuations in an economic activity of a nation without intervention by the policymakers or government on an individual basis. Some best-known built in stabilizers are personal and corporate taxes, and transfer systems such as unemployment insurance and welfare. Its advantage is that there is no necessity for political agreement and there is no time lag because it occurs automatically, without any change of policy. These are also automatically reversed.

They play a vital role to reduce the increase and decreases of nominal GDP; and normalizing the economy. When the economy is slows down, it plays an important role in raising the nominal GDP. When household's income declines; built-in-stabilizers stabilize nominal GDP through reduction of personal and corporate taxes. Thus increases the disposable income and raise the aggregate demand; and ultimately boost the economy with an increase in GDP. In the similar pattern, when economy is too high it raises the tax liabilities and reduction of transfers by the government; thus decreasing the disposable income and lowering the aggregate demand ; and ultimately slows the economy with a fall in GDP