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Automatic stabilizers | National income and price determination | AP Macroeconomics | Khan Academy - YouTube
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so what we have depicted in this diagram
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is the business cycle that we have
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looked at in other videos this
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horizontal axis is time vertical axis is
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real gdp what we see in this dark blue
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color you can view that as full
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employment
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output at different points in time and
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you can see that it is growing so this
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economy is experiencing economic growth
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maybe its population is increasing
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they're getting more productive maybe
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with better education or with better
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technology but we know that real
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economies don't just have this nice
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clean economic growth they tend to cycle
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around their full employment output that
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times when they're above the trend line
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like right over here you have a positive
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output gap so this is a positive output
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gap at that point right over there and
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you can also have negative output gaps
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we also talked in other videos about
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fiscal policy
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these are the tools that governments
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might use in order to close these output
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gaps for example when you have a
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positive output gap a government might
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be afraid that things are overheating
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maybe they're afraid of inflation they
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might have contractionary fiscal policy
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they might try to do something for that
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moment in time to bring to close that
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gap a little bit more likely when there
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is a negative output gap and people are
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out of work the government say hey i
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want let's pass a stimulus package
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explicitly to try to close this gap
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let's lower taxes let's increase
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government spending that type of fiscal
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policy where the government is doing
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something special for that circumstance
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in order to close that output gap that
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is discretionary discretionary
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fiscal policy set the discretion of the
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government to do it but we're going to
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focus on in this video are automatic
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stabilizers these are things that people
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don't have to take special action based
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on the circumstances in order for them
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to help smooth out the business cycle so
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automatic
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stabilizers
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so what are examples of automatic
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stabilizers so one common one is taxes
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so pause this video for a second and
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think about how do taxes help smooth out
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these fluctuations
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so let's think about what's happening at
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a part of the business cycle where the
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economy is expanding let's say right
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over there or let's say right over here
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what would be happening with taxes
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well in these realities with this
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positive output gap you could imagine
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people's incomes are going to get higher
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and higher corporate profits are going
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to be more and more and so our change in
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taxes
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is going to be positive and not only is
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it going to be positive not only your
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tax is going to increase in absolute
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dollar terms but they're probably going
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to grow at a faster rate than the
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economy why is that when the economy
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turns positive when you start expanding
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more more and more corporations are
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going to become profitable if you think
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about personal income taxes below
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certain incomes in a lot of countries
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you don't even have to pay income taxes
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and that for every incremental dollar or
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every incremental 10 000
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the tax rate on that incremental chunk
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could go up and so that's why the
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absolute dollar amount of taxes will
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likely increase as a at a faster rate
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than the actual economic growth and
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let's think about the other scenario
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let's think about what taxes do when we
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are in a recession so let's say we pick
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that place right over there well in this
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situation corporate profits are going to
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be lower in fact some corporations are
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going to come unprofitable in which case
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they wouldn't pay corporate taxes people
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are going to make less and less money so
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your change in taxes here is going to be
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likely to be negative and once again
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your rate of decrease in taxes is likely
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to be greater than your rate in decrease
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of real gdp the tax multiplier is
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negative and so it might smooth out the
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curve a little bit
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now another example of an automatic
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stabilizer would be
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things like
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welfare
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payments or unemployment insurance
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why would these be automatic stabilizers
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well when times are good when you have
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this positive output gap fewer and fewer
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people are going to need welfare or
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they're going to need unemployment
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payments and so in that world that is
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like a decrease in government spending
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the government's not going to have to
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pay for these benefits and so decrease
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in government spending that's
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contractionary and so that'll help
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smooth out the curve a little bit and
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once again when we have our when we when
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we go into our recession and then when
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we start having our negative output gaps
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more people are going to be on welfare
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more people are going to need their
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unemployment benefits and so that's
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going to increase government spending
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which might with the with the multiplier
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smooth out this curve a little bit and
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so the big takeaway is is when the
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government does something explicitly for
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the time that they are in in order to
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smooth out the curve that's
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discretionary fiscal policy but you
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might have things in the system the
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existing tax policy existing laws around
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welfare or unemployment insurance or
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other benefits that might have an effect
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of regardless of where we are in the
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business cycle they are a dam they have
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a dampening effect they try to they
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would smooth out these oscillations a
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little more they would be automatic
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stabilizers
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