Discretionary Fiscal Policy vs. Automatic Stabilizers

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The two primary types of fiscal policy used by the government are discretionary fiscal policies, which are deliberated and enacted on a case-by-case basis, depending on the prevailing economic situation, and automatic stabilizers, which are designed to take effect automatically for certain situations, such as an overheating economy or a period of poor economic performance. The benefit of automatic stabilizers is that they do not need to be deliberated and debated before taking effect, so they can address economic situations more quickly.

Fiscal Policy

  • Fiscal policy refers to a variety of discretionary activities the government engages in to influence the economy. The most prominent fiscal policy involves changes to the tax code. For example, to encourage economic growth, the government may choose to lower taxes generally, across all income levels, to put more money in the pockets of consumers so that they will spend more on goods and services to stimulate the economy.

Monetary Policy

  • Monetary policy refers to a set of discretionary policies taken primarily by the Federal Reserve Board. The two primary monetary policies involve changes to the money supply and changes to interest rates. By increasing the supply of money or lowering interest rates, the Federal Reserve is attempting to increase spending to encourage purchases of goods and services.

Progressive Tax System

  • The progressive tax system is one of the principal automatic stabilizers used to help regulate the economy. The progressive tax system is used to slow down an economy that may be overheating. As the incomes of some individuals rise, they enter higher tax brackets, meaning that more and more of their money is taken in taxes, so they have less to spend than they otherwise would.

Unemployment Benefits

  • Unemployment benefits are the principal automatic stabilizers used to promote economic recovery during a recession. As more individuals become unemployed, they collect benefits from the government, meaning that they have money to spend on goods and services. Without unemployment benefits, consumers as a whole would have less money to spend and the economy would recover much more slowly.

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