Essay/Term paper: How are automatic stabilizers used to combat inflation?

Essay, term paper, research paper:  Economics

How are Automatic Stabilizers Used to Combat Inflation?


In today's economy, there are devices present called automatic
stabilizers. Automatic stabilizers, are mechanisms which aid in the correction
of an economic problem without the interference of anyone or anything. They are
perhaps most useful to combat demand - pull inflation. Demand - pull inflation,
is when prices rise because the economy cannot produce enough goods to satiate
the economy. An automatic stabilizer, that is beneficial to combat such a
problem, is a progressive tax. A progressive tax, is a tax that becomes a
higher rate for each increasing level of gross domestic product. If such a tax
is present within the economy, when the society becomes more prosperous, such as
in the situation with demand-pull inflation, the citizens are taxed more,
therefore decreasing the marginal propensity to consume, and decreasing
consumption. The marginal propensity to consume is the fraction of any change
in disposable income spent for consumer goods. If this decreases, demand will
not be as high above, or even above where the supply is, therefore reducing the
demand - pull inflation.
Another way to stabilize demand - pull inflation is to reduce government
spendings. Government spendings, are the spending that the government make with
the tax revenues, and they add to the gross domestic product. An automatic
stabilizer that will lower gross domestic product is welfare. As income rises,
there are less people who need welfare, therefore reducing the amount of
government spending, and lowering the gross domestic product.
Due to such automatic stabilizers as progressive tax rates and the
decrease of government spending due to welfare, therefore a decrease in
government borrowing, therefore a decrease in the demand for the dollar,
therefore a decrease in the interest rate, which would cause a decrease in the
foreign demand for dollar, which would cause the dollar to depreciate, therefore
lowering inflation due to a less valuable dollar.
Using automatic stabilizers causes the government to be able to put less
work in the US fiscal policy. Also, it saves time in fixing an economic problem,
because discretionary fiscal policy (policy in which the government must put
into action themselves) would take the time of recognizing the problem, passing
a bill to combat the problem, and then waiting for it to come into effect. With
automatic stabilizers, the only time wasted is waiting for the effect to become
noticeable.