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Built-in stabilizers
 

 

Institutional features of the economy which without explicit government intervention automatically act to dampen down fluctuations in employment and national income. Examples of these are (a) unemployment benefits and welfare payments, which automatically increase in total when unemployment increases and fall in total when unemployment falls, so that this part of government expenditure adjusts automatically in the desired directions to offset in part changes in other components of aggregate demand, and (b) government taxation, which falls in total as national income falls and rises as national income rises, both because the incidence of income taxes changes and because, with change in consumption expenditures, sales taxes also change. Since an increase in taxation tends to restrain expenditure, while a fall in taxation stimulates it, we again have automatic factors counteracting inflationary and deflationary pressures in the economy. The effectiveness of these built-in stabilizers must not be exaggerated, however. They rarely have sufficient force to render positive corrective policies uhnecessary.

Reference: Oxford Press Dictonary of Economics, 3rd edt.