Answer: Automatic fiscal policy are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic fiscal policy includes automatic changes in taxes and needs-tested spending. The government often sets tax rates rather than a total dollar amount of taxes. During a recession, taxes receipts automatically decrease and needs-tested spending increases, so the budget deficit increases (or the budget surplus decreases). During an expansion, tax receipts automatically increase and means-tested spending decreases, so the budget deficit decreases (or the budget surplus increases).
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ReplyDeleteAutomatic fiscal policy are features of fiscal policy that stabilize real GDP without the need for explicit policy action by the government. Automatic fiscal policy includes automatic changes in taxes and needs-tested spending. The government often sets tax rates rather than a total dollar amount of taxes. During a recession, taxes receipts automatically decrease and needs-tested spending increases, so the budget deficit increases (or the budget surplus decreases). During an expansion, tax receipts automatically increase and means-tested spending decreases, so the budget deficit decreases (or the budget surplus increases).