What are automatic stabilizers in an economy?

Automatic stabilizers are mechanisms built into the fiscal framework of an economy that act to moderate the fluctuations in economic activity without the need for deliberate intervention by policymakers. They include elements such as progressive tax systems and social welfare programs, which automatically adjust to changing economic conditions.

For example, during an economic downturn, unemployment rises, leading to increased claims for unemployment benefits. This automatic increase in welfare spending helps to support consumer spending, softening the impact of the recession. Similarly, when the economy is booming, tax revenues increase due to higher income levels, which can help cool down a potentially overheating economy.

These stabilizers work based on existing laws and economic conditions, providing a counter-cyclical effect that helps to smooth out the economic cycle automatically, thus maintaining overall stability without the need for specific legislative action.