3.9 Automatic Stabilizers

a. Define automatic stabilizers. b. Explain how automatic stabilizers moderate business cycles.

• Automatic stabilizers support the economy during recessions and help prevent the economy from being overheated during expansionary periods.
• Tax revenues decrease automatically as GDP falls, preventing consumption and the economy from falling further.
• Tax revenues increase automatically as GDP rises, slowing consumption and preventing the economy from overheating.
• Government policies, institutions, or agencies may also have social service programs whose transfer payments act as automatic stabilizers.
• Enduring understanding POL-1: Fiscal and monetary policy have short-run effects on macroeconomic outcomes.