Final answer:
Automatic stabilizers are features of fiscal policy that automatically adjust taxes and spending in response to economic events.
They help offset shifts in aggregate demand but do not eliminate them entirely. Discretionary fiscal policy, on the other hand, involves deliberate changes in taxation and spending by the government in response to economic events.
Step-by-step explanation:
Automatic stabilizers are features of fiscal policy that operate without any further legislation, automatically adjusting taxes and spending in response to changes in the economy.
These stabilizers help to offset shifts in aggregate demand, but they do not completely eliminate them. For example, during a recession, lower wages result in lower taxes being withheld from paychecks, while higher unemployment leads to increased government spending on benefits.
These mechanisms act as shock absorbers, reducing the impact of economic shocks.
However, automatic stabilizers only offset about 10% of the initial movement in the level of output historically, so they are not sufficient to fully stabilize the economy.
Despite their limitations, they are still useful in minimizing the impact of economic downturns.
On the other hand, discretionary fiscal policy involves deliberate changes in taxation and spending by the government in response to economic events. It can be more effective than automatic stabilizers but is also subject to time lags, uncertain effects on interest rates, and political considerations.
Many economists and policymakers view discretionary fiscal policy as a blunt instrument and recommend its use only in extreme situations.
\