Editing Automatic stabilizer (section)

==Incorporated into the expenditure multiplier==
This section incorporates automatic stabilization into a broadly [[Keynesian]] [[Multiplier (economics)|multiplier]] model.

<math>Multiplier=\frac{1}{1-[MPC(1-T)-MPI]}</math>
*'''MPC''' = [[Marginal propensity to consume]] (fraction of incremental income spent on domestic consumption)
*'''T''' = Marginal (induced) tax rate (fraction of incremental income that is paid in taxes)
*'''MPI''' = Marginal Propensity to Import (fraction of incremental income spent on imports)

Holding all other things constant, [[ceteris paribus]], the greater the level of taxes, or the greater the MPI then the value of this multiplier will drop. For example, lets assume that:

:→ ''MPC'' = 0.8

:→ ''T'' = 0

:→ ''MPI'' = 0.2

Here we have an economy with zero marginal taxes and zero transfer payments. If these figures were substituted into the multiplier formula, the resulting figure would be '''2.5'''. This figure would give us the instance where a (for instance) $1 billion change in expenditure would lead to a $2.5 billion change in equilibrium real GDP.

Lets now take an economy where there are positive taxes (an increase from 0 to 0.2), while the MPC and MPI remain the same:

:→ ''MPC'' = 0.8

:→ ''T'' = 0.2

:→ ''MPI'' = 0.2

If these figures were now substituted into the multiplier formula, the resulting figure would be '''1.79'''. This figure would give us the instance where, again, a $1 billion change in expenditure would now lead to only a $1.79 billion change in equilibrium real GDP.

This example shows us how the multiplier is lessened by the existence of an automatic stabilizer and thus helping to lessen the fluctuations in real GDP as a result of changes in expenditure. Not only does this example work with changes in '''T''', it would also work by changing the '''MPI''' while holding '''MPC''' and '''T''' constant as well.

There is broad consensus among economists that automatic stabilizers often exist and function in the short term.

Additionally, [[imports]] often tend to decrease in a recession, meaning more of the national income is spent at home rather than abroad. This also helps stabilize the economy.