What are automatic stabilizers in economic policy?

Automatic stabilizers are mechanisms built into the fiscal system that adjust government spending and taxation levels without the need for additional legislation. They work automatically to counteract fluctuations in economic activity, helping to stabilize the economy during periods of contraction or expansion.

For instance, during an economic downturn, automatic stabilizers such as unemployment benefits and welfare programs increase government spending because more individuals qualify for these benefits as they lose jobs or experience reduced income. Conversely, in times of economic growth, tax revenues tend to rise without any new tax legislation, as individuals earn more and fall into higher tax brackets. This automatic adjustment helps to moderate the business cycle by providing a buffer against extreme fluctuations.

In contrast, options that suggest the need for new legislation emphasize a more active role in policymaking, which contradicts the nature of automatic stabilizers that function without deliberate government intervention. Stabilizers do not solely increase spending; they also involve the reduction of tax revenues, which is not highlighted in the choices regarding automatic spending increases. Additionally, while government earnings from tax revenues are related to fiscal policy, they do not capture the essence of automatic stabilizers, which focus on the automatic changes rather than just the income generated from taxes.