Final answer:
Automatic stabilizers work by adjusting taxes and government spending automatically based on the economic conditions. They decrease taxes and increase spending during a recession, and increase taxes and decrease spending during a boom. Their main advantage is that they operate quickly and automatically, providing timely support to the economy.
Step-by-step explanation:
Automatic stabilizers are government policies that work to stabilize the economy without the need for explicit action from policymakers. They operate automatically based on the economic conditions. On the taxation side, automatic stabilizers work by decreasing taxes during a recession and increasing them during a boom. This is because during a recession, people's income decreases, resulting in lower tax revenue for the government. Conversely, during a boom, people's income increases, leading to higher tax revenue.
On the spending side, automatic stabilizers decrease spending during a recession and increase it during a boom. This is because during a recession, more people may become eligible for government assistance programs like unemployment benefits and welfare, which leads to an increase in government spending. During a boom, fewer people qualify for these programs, resulting in a decrease in government spending.
The main advantage of automatic stabilizers over discretionary fiscal policy is that they operate quickly and automatically, without the need for policymakers to take immediate action. This means that during a recession, automatic stabilizers can help stimulate the economy by providing income support and reducing the impact of the downturn. Similarly, during a boom, automatic stabilizers can help prevent the economy from overheating by decreasing government spending and increasing tax revenue