Question

Firms and households in lower-income countries pay relatively little tax (compared to higher income countries) and receive few benefits when they lose their jobs. Discuss the role of automatic stabilisers in low-income countries in stabilising the fluctuations in GDP.

Answer 1

Automatic stabilizers are referred to features of tax system that offsets fluctuations in economic variables without direct intervention by policymakers . As for example , let us assume that in a country income tax is progressive in nature . So when people start to have higher incomes , they automatically fall into higher tax rate slabs and hence aggregate demand is controlled . No changes in legislation is required . In low-income countries government run welfare programmes are usually present . People when experience low incomes , the aggregate demand in the economy falls . At that time they automatically becomes eligible for such programmes and thus can maintain their purchasing power . Also in low income countries , the social benefits like unemployment benefits alters as per eligibility . This causes automatic stabilization of AD in the economy through tax instruments .