Question

Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy's built-in stability? Essay Toolbar navigation В І s 를 들 A A

Answer 1

automatic stabilizers are the tools of fiscal policy governed by the government of a country.these tools are helpful in the steady growth of the economy.

working of automatic stabilizers

in Peak period-

when economy is in boom situation and there is huge demand of goods and supply which result in the situation to inflation in the economy then this situation needed to be controlled.government decreases its public spending and increases tax rates in the economy which would help the government to maintain the equilibrium level.

in Depression period-

in recession/depression period government wants to increase the income and employment in the economy so government initiates public spending,economic incentives and reduces the tax.this boost up the economy and economy is again at equilibrium.

basis of taxation-

• PROPORTIONAL TAXATION SYSTEM- in the proportional taxation the rate of tax remains same irrespective of the level of income.this is known as proportional taxation system.in this method the utility of money remains same with an increase/decrease in income.

• REGRESSIVE TAXATION SYSTEM-in this concept,rate of tax decreases when income increases.it induces people to earn more and more so they would be paying lower tax.in this method the utility of money increases with an increase in income.

• PROGRESSIVE TAXATION SYSTEM-in this concept,rate of tax increases with an increase in income.in this method the utility of money decreases with an increase in income.