In fact, some corporationsĪre gonna become unprofitable, in which case they wouldn't Well, in this situation, corporate profits are going to be lower. Let's think about what taxes do when we are in a recession. And let's think about the other scenario. And so that's why the absoluteĭollar amount of taxes will likely increase at a faster rate than the actual economic growth. In a lot of countries, you don't even have to pay income taxes, and that for every incremental dollar or every incremental $10,000, the tax rate on that incremental chunk could go up. If you think about personal income taxes, below certain incomes Why is that? When the economy turns positive, when you start expanding more, more and more corporations are Is going to be positive, and not only is it going to be positive, not only are taxes going to increase in absolute dollar terms, but they're probably gonna Incomes are going to get higher and higher, corporate profitsĪre going to be more and more, and so our change in taxes With this positive output gap, you could imagine people's What would be happening with taxes? Well, in these realities, Let's say right over there, or let's say right over here. Out these fluctuations? So let's think about what's happening at a part of the business cycle where the economy's expanding, So pause this video forĪ second and think about how do taxes help smooth So what are examples ofĪutomatic stabilizers? So one common one is taxes. On the circumstances in order for them to help These are things that people don't have to take special action based What we're going to focus on in this video are automatic stabilizers. To close that output gap, that is discretionary,ĭiscretionary fiscal policy. "Let's increase government spending." That type of fiscal policy, where the government isĭoing something special for that circumstance in order The government will say, "Hey, let's pass a stimulus package, "explicitly to try to close More likely, when there'sĪ negative output gap and people are out of work, They might try to do somethingįor that moment in time to bring to close that gap a little bit. They might haveĬontractionary fiscal policy.
For example, when you haveĪ positive output gap, a government might be afraid These are tools that governments might use in order to close these output gaps.
So this is a positive output gap at that point right over there. There are times when theyĪre above the trend line. But we know that realĮconomies don't just have this nice, clean economic growth. Maybe it's population is increasing, they're getting more productive, maybe with better education So this economy isĮxperiencing economic growth. What we see in this dark blue color, you can view that asįull employment output at different points in time, and you can see that it is growing. Have depicted in this diagram is the business cycle
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