Automatic_Stabilizers_1_ - AutomaticStabilizers:HowTheyWork

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Automatic Stabilizers:  How They Work Automatic stabilizers are a very important feature of our economy and probably explain  why we have not suffered a repeat of the Great Depression.  I would like you to have a  little more information about how these important features of our economy work.   The graph below shows the derivation of the IS curve for two economies that are  identical in all respects except one economy has a lump sum tax, T =, and the other  economy has an income tax , T = + t Y .  Notice the difference in the type faces.  The  different type faces will help you to keep track of the two different economies. " t  "  is the  marginal rate of income taxation and at the level of income,  Y 0 , = T(Y 0 ) .  In other  words, at the level of income ,  Y 0,   the   two tax systems collect the same revenue.   At  lower levels of income, T  > T and vice versa at higher levels of income.  Notice in the  diagram that the level of national saving in the two economies is the same when income  is equal to Y 0 .  This follows from the assumption that except for the income tax all other  aspects of the two economies are the same.  With the same level of national saving and 
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This note was uploaded on 03/02/2010 for the course ECON 57 taught by Professor Woglom during the Spring '08 term at UMass (Amherst).

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Automatic_Stabilizers_1_ - AutomaticStabilizers:HowTheyWork

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