How Are Automatic Stabilizers Used To Combat Inflation? :: essays research papers

How are Automatic Stabilizers Used to Combat Inflation?In todays economy, there are devices present called automaticstabilisers. Automatic stabilizers, are mechanisms which aid in the correctionof an economic problem without the interference of anyone or anything. They are possibly most useful to beset invite - pull inflation. Demand - pull inflation,is when prices rise be stick the economy cannot produce enough goods to satiatethe economy. An automatic stabilizer, that is beneficial to combat such aproblem, is a progressive tax. A progressive tax, is a tax that becomes ahigher rate for each increasing level of blunt domestic product. If such a taxis present within the economy, when the society becomes more prosperous, such asin the situation with demand-pull inflation, the citizens are taxed more, wherefore change magnitude the marginal propensity to consume, and decreasingconsumption. The marginal propensity to consume is the fraction of any changein disposable income spent fo r consumer goods. If this decreases, demand willnot be as high above, or even above where the supply is, therefore reducing thedemand - pull inflation.Another way to stabilize demand - pull inflation is to reduce organisationspendings. Government spendings, are the spending that the government make withthe tax revenues, and they add to the gross domestic product. An automaticstabilizer that will lower gross domestic product is welfare. As income rises,there are less people who need welfare, therefore reducing the amount ofgovernment spending, and lowering the gross domestic product.Due to such automatic stabilizers as progressive tax rates and thedecrease of government spending due to welfare, therefore a decrease ingovernment borrowing, therefore a decrease in the demand for the dollar,therefore a decrease in the interest rate, which would cause a decrease in theforeign demand for dollar, which would cause the dollar to depreciate, thereforelowering inflation due to a less valuabl e dollar.