Automatic fiscal stabilisers are :

Question

Question

This question was previously asked in

Kerala PSC Common Preliminary Exam (GRADUATE LEVEL) PYP - 47/24

Changes in taxes and government transfer payments that occur when the level of income changes
Changes in the level of income that occur due to changes in tax rates and government transfer payments
Variables that lead to an increase in public revenue
Changes in government expenditure that lead to an increase in income levels

Answer 1

The correct answer is Changes in taxes and government transfer payments that occur when the level of income changes.

Key Points

Automatic fiscal stabilisers refer to mechanisms in the economy that automatically adjust fiscal policies such as taxes and transfer payments based on income levels, without explicit intervention by policymakers.
These stabilisers help counteract fluctuations in the economy by moderating the impact of economic cycles. For example, during a recession, tax revenue decreases, and transfer payments increase, providing relief to affected individuals.
Key examples of automatic stabilisers include progressive income tax systems and unemployment benefits.
They are considered "automatic" because these adjustments happen without the need for new legislation or active intervention from the government.

Important Points

The primary objective of automatic fiscal stabilisers is to reduce the volatility of economic cycles and maintain stability in aggregate demand.
Unlike discretionary fiscal measures, automatic stabilisers do not require active decision-making from policymakers, allowing them to respond quickly to changes in economic conditions.
They are an integral part of modern economic systems, especially in developed economies.

Additional Information

Option 2: Changes in the level of income that occur due to changes in tax rates and government transfer payments refer to discretionary fiscal policy, where policymakers actively adjust tax rates or transfer payments to influence economic activity. This is not automatic and requires explicit government intervention.
Option 3: Variables that lead to an increase in public revenue typically refer to strategies for boosting government income, such as tax hikes or new revenue streams, which may or may not stabilize the economy automatically.
Option 4: Changes in government expenditure that lead to an increase in income levels describe discretionary government spending, such as infrastructure projects or stimulus packages, which are planned and implemented by policymakers rather than automatic mechanisms.