Final answer:
Built in stability constitutes automatic stabilizers, which are part of an automatic budgetary policy that helps to smooth out economic cycles without the need for new legislation. Automatic stabilizers respond to changes in the economy by adjusting tax and spending levels, acting as the economy's shock absorbers.
Step-by-step explanation:
Built in stability constitutes automatic stabilizers or passive or automatic budgetary policy. Fiscal policy operates through two primary methods: discretionary fiscal policy, which involves deliberate changes in taxation or spending by the government in response to economic events, and automatic stabilizers, which are inherent budgetary features that adjust taxation and spending automatically without the need for new legislation.
Automatic stabilizers are designed to mitigate the fluctuations in an economy, reducing the severity of economic cycles. For instance, if unemployment rises, the government will automatically spend more on unemployment benefits without requiring new laws, and less in taxes will be collected due to lower incomes. Conversely, when the economy is booming, tax revenues increase, and spending on benefits decreases, which can help cool down the economy. Automatic stabilizers are like the economy's shock absorbers, softening the impact of economic downturns.
Such policy tools are crucial because they provide quick and direct responses to economic changes, helping to offset shifts in aggregate demand. They are especially praised for their ability to act swiftly, often with less of the political delays associated with discretionary fiscal policy. The effectiveness of automatic stabilizers was notably visible during the economic downturn caused by the COVID-19 pandemic in 2020, where increased unemployment insurance payments and reduced tax revenues automatically contributed to a significant government budget deficit, aimed at softening the recession's impact.