What are automatic stabilisers?

Automatic stabilisers are elements of government spending and taxation that change with the economic cycle without any deliberate policy decision, dampening fluctuations in aggregate demand.

Explain how automatic stabilisers cushion the economy during a downturn.

As incomes and spending fall, receipts from income tax, national insurance and VAT fall automatically while unemployment-related welfare payments rise, which supports disposable income and limits the fall in aggregate demand.

Why do time lags weaken discretionary fiscal policy?

It takes time to recognise the problem, agree the measures and implement them, so the stimulus may only take effect once the economy has already recovered, making the policy destabilising.

What relationship does the Laffer curve illustrate, and what shape does it take?

It illustrates the relationship between the tax rate and total tax revenue, and takes the shape of an inverted U, with revenue rising as the rate increases up to a maximum and then falling.

WJEC A-Level Economics 1520QS

Scarcity and Choice

Topic overview Scarcity, choice and opportunity cost Production possibility frontiers (PPFs): Production possibility frontier diagrams to depict choice Production possibility frontiers (PPFs): Factors which may shift the PPF inwards or outwards Specialisation, division of labour and exchange: Advantages and disadvantages of specialisation Specialisation, division of labour and exchange: Productivity

Demand and Supply in Product Markets

Topic overview Factors influencing demand and supply in product markets: Product market Factors influencing demand and supply: Main influences on demand and supply in product markets The determination of equilibrium price: Equilibrium price and output, and disequilibrium The determination of equilibrium price: How the market adjusts to a new equilibrium The determination of equilibrium price: Consumer and producer surplus on the diagram Consumer and producer surplus Price, income and cross price elasticities: Price elasticity of demand Price, income and cross price elasticities: Income and cross price elasticity of demand Price, income and cross price elasticities: Price elasticity of supply, uses of elasticity and tax incidence

Demand and Supply in Labour Markets

Topic overview Wage determination: Demand for labour as a derived demand Wage determination: Equilibrium wage rate and shifts in labour demand and supply Wage determination: Elasticity of demand for labour and Elasticity of supply of labour Wage determination: Causes of wage differentials, Effects of wage differentials, and wages in Wales Labour market issues: Factors which affect flexibility in labour markets Labour market issues: Effects of the statutory national minimum wage on labour markets Labour market issues: Impact of migration on labour markets

Resource Allocation

Topic overview How resources are allocated in a free market economy: Role of profit How resources are allocated in a free market economy: Derived demand and the assumptions of a free market

Market Failure

Topic overview Understanding market failure: Market failure Understanding market failure: Public goods, Merit and demerit goods Understanding market failure: Externalities Understanding market failure: Externalities of consumption and monopoly power Understanding market failure: Information asymmetries and gaps, Income inequality Understanding market failure: Volatile prices and externality diagrams Why and how governments intervene in markets: Reasons for government intervention in markets Why and how governments intervene in markets: Maximum prices, road pricing, pollution permits and other interventions Why and how governments intervene in markets: Evaluating government intervention The effects of government intervention: Government intervention can create distortions in markets The effects of government intervention: Reasons for government failure

Macroeconomic Theory (AS)

Topic overview The circular flow of income model: Flows in the circular flow model The circular flow of income model: Injections into and withdrawals from the circular flow The circular flow of income model: Model to explain the concept of national income equilibrium The units of aggregate demand (AD): Units of aggregate demand: consumption The units of aggregate demand (AD): Factors affecting consumption and investment, and the AD curve The AD function: Why an AD function will slope downward from left to right The AD function: Changes in the units The aggregate supply (AS) function: Shape of the Keynesian long run aggregate supply curve The aggregate supply (AS) function: Factors which might result in a shift in LRAS AD/AS analysis

Government Policy Objectives

Topic overview Economic growth: Actual and potential growth, output gaps and the business cycle Economic growth: Benefits of economic growth for households, government and firms Economic growth: Illustrating growth on PPF and AD/AS diagrams Unemployment (AS): Measurement and types Unemployment (AS): Costs Unemployment (AS): Causes

Policy Instruments (AS)

Topic overview Fiscal policy: Framework Fiscal policy: Direct and indirect taxes and demand side fiscal policy Fiscal policy: Automatic stabilisers, time lags and the Laffer curve Monetary policy: Bank of England and the Monetary Policy Committee, Inflation target Monetary policy: Bank Rate and the transmission mechanism Exchange rates and exchange rate policy: Exchange rates in a free market Exchange rates and exchange rate policy: Exchange rate policy Supply side policies: Aims of supply side policies Supply side policies: Market-based supply side policies and Limitations of supply side policies

International Trade (AS)

Topic overview Free trade and protectionism: Benefits and costs of free trade Free trade and protectionism: Main forms of protection; tariffs, quotas and other barriers Free trade and protectionism: Benefits and costs of protectionism

Costs, Revenues and Profits

Topic overview Costs, revenues and profits: Law of diminishing returns Costs, revenues and profits: Product, total and average costs Costs, revenues and profits: Total, average and marginal values for revenue and costs Costs, revenues and profits: Internal and external economies and diseconomies of scale Costs, revenues and profits: Concept of profit maximisation The growth of firms: How and why firms might grow The growth of firms: Types of integration/ mergers Efficiency

Market Structures

Topic overview Background to market structures Business objectives Perfect competition: Perfect competition and its underpinning assumptions Perfect competition: Efficiency of perfectly competitive markets Monopolistic competition Monopoly: Monopoly and its underpinning assumptions Monopoly: Comparing monopoly with perfect competition Monopoly: Potential costs and benefits of monopoly Oligopoly: Main features of oligopolistic markets and the concept of interdependence Oligopoly: Potential costs and benefits of oligopoly Competition policy: Why governments are concerned about monopoly power Competition policy: Benefits and limits of competition Privatisation: Way in which privatisation may increase competition Privatisation: Effects of privatisation on competition

Macroeconomic Theory (A2)

Topic overview Short run aggregate supply (SRAS)Long run aggregate supply (LRAS): Neo-Classical view of the process Long run aggregate supply (LRAS): Keynesian economists disagree with this process of adjustment The short run Phillips curve The long run Phillips curve

Macroeconomic Objectives (A2)

Topic overview Economic growth: Actual vs potential economic growth and Causes of growth Economic growth: Benefits and costs of growth Unemployment (A2): Measurement and types Unemployment (A2): Costs, measurement and the Phillips curve Unemployment (A2): Causes Inflation and deflation: Measurement and calculation Inflation and deflation: Causes Inflation and deflation: Costs Inflation and deflation: Deflation The balance of payments: Current account imbalances: causes The balance of payments: Current account imbalances: impacts The balance of payments: Solutions to current account deficits

Policy Instruments (A2)

Topic overview Control of the national (public sector) debt: Causes Control of the national (public sector) debt: Implications The operation of monetary policy: Interest rates and how quantitative easing works The operation of monetary policy: Effects and criticisms of quantitative easing The operation of monetary policy: Quantitative tightening, Funding for Lending and the financial sector Monetary stability: Asset bubbles and financial crises Financial stability

International Trade (A2)

Topic overview Advantages and disadvantages of free trade: Advantages of free trade Advantages and disadvantages of free trade: Disadvantages of free trade Protectionism: Free trade compared with protectionist measures Protectionism: Key methods of protectionism Globalisation: What globalisation is and what drives it, Benefits of globalisation Globalisation: Costs of globalisation and Evaluating the net impact of globalisation Trade and the UK: Absolute and comparative advantage, Terms of trade and the gains from trade Trade and the UK: Disadvantages of international trade Trade and the UK: Methods of protection Trade and the UK: Arguments for and against protectionism Trade and the UK: World Trade Organisation and globalisation Trade and the UK: UK’s major export sectors and an integrated world economy

Non-UK Economies

Topic overview European Union: Advantages and disadvantages of membership of the EU European Union: Whether the continuous expansion of the EU is beneficial European Union: EMU as an optimal currency area, and challenges facing MEDCs and emerging economies

Economic Development

Topic overview Measurement: What is meant by economic development and how it is measured Measurement: Human development index, More indirect indicators such as access to health and education Obstacles: Why LEDCs may face difficulties in competing with MEDCs Obstacles: Relevant obstacles Solutions: Liberalisation as a route to development, Aid and debt relief Solutions: Foreign direct investment and trade strategies

Policy Instruments (AS)

Fiscal policy: Automatic stabilisers, time lags and the Laffer curve

3 things to know
AS Units 1 and 2

Overview

Automatic stabilisers and discretionary fiscal policy, why time lags weaken it, the Laffer curve, and calculating a budget deficit or surplus.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

How does discretionary fiscal policy differ from the operation of automatic stabilisers?

Who and when

A government is taxing beyond the revenue-maximising rate. According to the Laffer curve, what happens to revenue if it cuts the rate?

Key term

What is the difference between a budget deficit and a budget surplus?

Questions from this subtopic

Each one with the model answer underneath.

1
What are automatic stabilisers?
Model answer
Automatic stabilisers are elements of government spending and taxation that change with the economic cycle without any deliberate policy decision, dampening fluctuations in aggregate demand.
2
Explain how automatic stabilisers cushion the economy during a downturn.
Model answer
As incomes and spending fall, receipts from income tax, national insurance and VAT fall automatically while unemployment-related welfare payments rise, which supports disposable income and limits the fall in aggregate demand.
3
How does discretionary fiscal policy differ from the operation of automatic stabilisers?
Model answer
Discretionary fiscal policy involves deliberate decisions to change spending or tax rates, whereas automatic stabilisers operate through the existing tax and benefit system without any new decision.
4
Why do time lags weaken discretionary fiscal policy?
Model answer
It takes time to recognise the problem, agree the measures and implement them, so the stimulus may only take effect once the economy has already recovered, making the policy destabilising.
5
What relationship does the Laffer curve illustrate, and what shape does it take?
Model answer
It illustrates the relationship between the tax rate and total tax revenue, and takes the shape of an inverted U, with revenue rising as the rate increases up to a maximum and then falling.
6
A government is taxing beyond the revenue-maximising rate. According to the Laffer curve, what happens to revenue if it cuts the rate?
Model answer
Revenue rises, because improved incentives to work and less avoidance widen the tax base by proportionally more than the rate is cut.

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