What is the difference between discretionary fiscal policy...

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Key Concepts

Discretionary Fiscal Policy

Discretionary fiscal policy refers to deliberate changes made by the government in tax rates, government spending, or other fiscal instruments to influence the economy. These actions are initiated through new legislation or specific policy adjustments in response to current economic conditions, and they involve active decision making by policymakers. They contrast with automatic mechanisms by being explicitly designed to change fiscal policy rather than occurring naturally as a result of economic fluctuations.

Automatic Stabilizers

Automatic stabilizers are inherent fiscal mechanisms that naturally counterbalance the economic cycle without additional legislative action. They operate through existing programs like unemployment benefits, progressive taxation, and welfare services, which automatically increase government spending or decrease tax revenues when the economy slows down, and do the opposite when the economy picks up. This automatic response helps moderate fluctuations in aggregate demand without the need for new intervention by policymakers.

Transcript

00:01 Hey, and welcome to another economics tutorial where we're going to be talking some more about fiscal policy.

00:07 In this example, we're going to be talking a little bit about the difference between discretionary fiscal policy and automatic stabilizers.

00:14 And this is a pretty simple distinction.

00:19 It's basically in the name of automatic stabilizers.

00:22 So automatic stabilizers are things that are put in place that can help with the negative effects of, you know, negative effects.

00:32 Say a recession or, you know, can help deal with inflation.

00:39 So the most common example of a stabilizer would be things like unemployment benefits.

00:50 So employment insurance is always effective, like it's always active.

00:56 Even during booms in the economy, unemployment insurance or any kind of other unemployment benefits are still there.

01:08 And they will be there.

01:09 And hopefully unemployment insurance is making more money during a boom so that during a bust, they can handle the increased traffic from the increase in unemployed people.

01:22 So there's also things like food stamps, which are, again, always available, but that help to stabilize the economy when it starts to have a downturn.

01:31 So that is a weird f.

01:35 So things like food stamps is another example.

01:39 Of an automatic stabilizer...

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