MAcro CHAPTER 3.9:

CHAPTER SUMMARY

Governments are not always quick to respond to economic issues. Especially in the United States, the two parties frequently disagree about how to handle economic crises. As a result, some of the economic response from government comes from automatic stabilizers. These are changes in government spending and taxation that occur without the government passing any new laws.

Here are some examples:

• Progressive taxation: As incomes rise and consumers spend more, governments automatically start collecting more taxes. AD rises due to more consumer spending, but falls due to more taxation. The opposite is also true, as when incomes fall, governments collect less taxes.

• Unemployment benefits: Many governments give monthly "unemployment checks" to those who are unable to find work. In a situation where unemployment is high, governments will give out more unemployment benefits. This means that, although Real GDP is too low due to high unemployment, the government automatically increases spending, shifting the AD to the right, and getting our short-run aggregate equilibrium closer to the LRAS. The opposite is also true, as when unemployment is low, governments reduce spending on unemployment benefits.

These changes in government spending and taxation may not perfectly balance the economy, but they do help keep economies closer to their LRAS without the government needing to pass new laws.

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