What are some of the elements that provide for "built-in stability" in the economy?

Expert Answers
mkoren eNotes educator| Certified Educator

In our economy, there are some built-in aspects that help to stabilize the economy during very prosperous or very difficult times.

When our economy becomes very active or prosperous, the government collects more money in tax revenues as people buy more products. People may also pay more income tax if their income rises as the economy grows significantly. These increased taxes have an impact of putting a brake on the economy to some degree. The government also would spend less on programs to help the poor because, in theory, people would be better off during these prosperous times. Government spending on food stamps and unemployment compensation would drop, also putting a brake on our economy.

The reverse happens when the economy slows down and we have a recession or a depression. The government will take in less tax revenue because people aren’t buying as much. People may also pay less income tax with a slow economy. Government spending on programs to help the needy should increase with a slow economy. More funds will be spent on food stamps and unemployment compensation during difficult economic times. This transfer of funds to individuals allows them to buy products. This helps the economy to some degree during a recession or depression.

These built-in stabilizers impact our economy during good times and bad times.

pohnpei397 eNotes educator| Certified Educator

What you are asking about here is what are called "built-in stabilizers."  This term refers to aspects of government policy that automatically tend to "stabilize" the economy when it moves towards recession or excessive inflation.

Taxes and some kinds of spending are built-in stabilizers.  When the economy starts to slow down, taxes take away less of the money that people are making.  At the same time, certain goverment spending programs kick in for more people.  These are programs like unemployment insurance or food stamps that give out more money when times are hard.

In this example, you have a system in which the government automatically takes less in taxes and gives out more in spending when times get hard.  This is a built-in stabilizer that is supposed to automatically stabilize the economy.