Explain the economy automatic stabiliser, Macroeconomics

Assignment Help:

Explain the economy automatic stabiliser

A budget deficit is shortfall between a government's tax revenue and its spending in a given year. If a government runs a budget deficit it would have to borrow money from financial markets and its own citizens by selling bonds and any new borrowing which is not paid back during the course of the year will be added to the national debt. The budget deficit is an illustration of an economic flow - the difference between the flow of spending and the flow of tax revenue - whereas the national debt is the stock of accumulated past central government borrowing.

A budget deficit will act as an economy's automatic stabiliser in a developed economy as it finances welfare and taxation system during a downturn. When an economy falls into recession, economic activity will slow down and unemployment will rise. When firms cut wages, lay off workers and cancel overtime hours then the government's taxation receipts will fall since fewer hours are being worked. There will also be an increase in the number of jobless workers claiming benefits like the Job Seeker's Allowance. In the UK number of jobless workers applying for Claimant Count increased from 780,000 in 2007 to 1,600,000 in 2011. This increase is largely explained by growth of the cyclical unemployment in recession.

These payments will stabilise the economy in 2 ways. First the deficit borrowing will finance benefits system without government having to increase taxation. Second the welfare benefit payments will make certain that workless households continue to have an income. The Indian economist Amartya Sen has argued that developed countries' welfare benefit systems prevent famines from taking place in industrial communities confronted with mass unemployment. Moreover when jobless workers receive benefits they are likely to spend all of the money in the economy on consumption of essential goods. This acts as a stabiliser on aggregate demand since consumption is the most significant component of demand.

 


Related Discussions:- Explain the economy automatic stabiliser

Voting for a republican candidate, Suppose that 70% of people who identify ...

Suppose that 70% of people who identify themselves as an "Independent" voter end up voting for a Republican candidate. What is the probability that out of 120 "independent" voters

Calculate percent removal pollutant and steady state, You are considering t...

You are considering three design alternatives for treating a pollutant in wastewater using a first-order process ( k = 1 min -1 ). The total flow is 10 million gallons per day (mg

Circular flow of income in an open economy, explain the effects of various ...

explain the effects of various injections and withdrawals and show the equilibrium in the circular flow

Economics, n 2013, approximately 58 percent of the adult population (245 mi...

n 2013, approximately 58 percent of the adult population (245 million) was employed, the lowest employment rate in 20 years. If the employment rate increased to the prerecession l

Price of gasoline has recently come down, The price of gasoline has recentl...

The price of gasoline has recently come down as has the quantity. Show graphically and explain what might have caused this.

What is as curve, The AS curve Say that nominal wage in year 1 (at a p...

The AS curve Say that nominal wage in year 1 (at a particular point in time) is equal to 1000. On the horizontal part of response curve, real wage is constant and equal to its

Marginal abatement cost curve, A critically important criterion that must b...

A critically important criterion that must be considered in evaluating environmental policies is whether they provide strong incentives for people to find new ways to improve ambie

Consumption, Consider two consumers, A and B. A and B both want perfect con...

Consider two consumers, A and B. A and B both want perfect consumption smoothing (c = cf) and both have no current wealth. However, the two consumers have different income streams.

Present worth of a cash flow, What is the present worth of a cash flow that...

What is the present worth of a cash flow that gives you $6 in every time period from 1 to 20 when the interest rate is zero?

Find the break-even point, The Widget Manufacturing Company must replace a ...

The Widget Manufacturing Company must replace a widget machine, and is evaluating the capabilities of two systems. A requirement of management is that the machine chosen must be p

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd