![]() ![]() Keynesians suggest that instead of borrowing the money, the government can increase its money supply and, thus, generate funds for the additional spending. The more the government borrows from the private sector, the fewer funds are available in the private sector for investments, research and development, etc. Crowding out is when government borrowing “crowds out” (replaces) funds that otherwise could be used by the private sector. Increased borrowing leads to something economists call crowding out. Government borrowing during recessionary gaps typically increases. Anytime government spending increases, the funds have to come from somewhere. Some economists, however, still question the effectiveness of automatic stabilizers, or any active fiscal policy, for that matter. The advantage of automatic stabilizers is that they do not suffer from the three lags mentioned in the previous section. Keynes strongly supported automatic stabilizers. This decrease in tax (compared to a system without progressive taxes) puts more money in people’s pockets and stimulates private spending.Īctive Government Policy and Crowding Out If the economy slows down, incomes decrease, and people pay less money in taxes. Most industrialized countries’ tax systems are set up to tax higher-income individuals and corporations at higher rates. According to Keynesians, this increase in government spending stimulates the economy. ![]() When the economy turns down and farmers struggle, the government’s expenses on farmer subsidies automatically increase. According to Keynesians, this increase in government spending prevents the economy from a more severe slowdown compared to what would occur if no unemployment compensation existed. When the economy turns down, the government’s expense on unemployment compensation automatically increases as more people lose their jobs. Automatic stabilizers are expense and taxation items that are part of existing economic programs.Įxamples of automatic stabilizers include Automatic stabilizers, on the other hand, do not need government approval and take effect immediately.Īutomatic stabilizers are changes in government spending and taxation that do not need approval by Congress or the President. Because discretionary fiscal policy is subject to the lags discussed in the last section, its effectiveness is often criticized. Examples include increases in spending on roads, bridges, stadiums, and other public works. Discretionary Fiscal Policy Discretionary fiscal policy represents changes in government spending and taxation that need specific approval from Congress and the President. ![]()
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