Which of the following would be automatic stabilizers? Employment-insurance paym

Question

Which of the following would be automatic stabilizers?

Employment-insurance payments

Cost-of-living escalators in government contracts and pensions

Free university tuition for unemployed workers after six months of unemployment, provided that they are under 30 years old and have had five or more years of full-time work experience since high school.

Is there a stigma attached to automatic stabilizers, and are they what are sometimes referred to, often derogatorily, as “entitlements”? As a student of macroeconomics do you see anything good in the automatic stabilizers? Why or why not?

Explanation / Answer

Automatic stabilizers are government purchases and taxes that automatically change during the business cycle. These include government spending on unemployment insurance and tax collection during a particular phase of business cycle.

Accordingly, Employment-insurance payments and COLA's are automatic stabilizers.

Automatic stabilizers are not merely entitlements. They do not require exigent and explicit policy action. They are in-built within the fiscal policy. Thus whenever there is a boom or recession, automatic stabilizers try to keep aggregate demand AD on a steady and regular course. These include welfare and transfer programs like food stamps and unemployment insurance.

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