Final answer:
Automatic stabilizers are mechanisms in fiscal policy that automatically increase government spending or decrease taxes when the economy slows down, helping to mitigate economic fluctuations without new legislation.
Step-by-step explanation:
Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines are known as automatic stabilizers. Such measures are designed to act as a buffer for the economy by slowing down the rate of decrease in aggregate demand during economic downturns, and restraining it when the economy accelerates. This happens without any new legislation being passed, making them an essential part of fiscal policy. For instance, during a recession, the government might spend more on unemployment benefits as more people become eligible, or tax revenues may decrease as incomes fall, leading to a lower amount of taxes being withheld from paychecks.
Automatic stabilizers serve like shock absorbers, smoothing out the economic cycles slightly. Though they do not offset all fluctuations in aggregate demand, historically, they have helped to mitigate about 10% of any initial movement in the level of output. While this may not eliminate economic shocks entirely, it can significantly reduce their negative impact on the economy.