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Automatic stabilisers

A government can also allow automatic stabilisers to influence aggregate demand.

Automatic stabilisers are forms of government spending and taxation that change, without any deliberate government action, to offset fluctuations in GDP.

Discretionary fiscal policy

Automatic stabilisers cannot prevent fluctuations. They merely reduce their magnitude.

If there is a fundamental disequilibrium in the economy or substantial fluctuations in other injections and withdrawals, the government may choose to alter the level of government expenditure or the rates of taxation.

Deliberate changes in government spending and taxation is known as discretionary fiscal policy.

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Automatic stabilisers and discretionary fiscal policy

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