Automatic stabilisers

[corza000]

Can someone please help me make sense of automatic stabilisers.

If they automatically stabilise the economy then why in a ‘boom’ would more tax collections and less welfare help slow AD? Wouldn’t the more people in jobs continue to grow AD. And vice versa, if in a downturn there there is less tax collections- how does this actually help to increase AD?

I get the whole revenue exceeding expenses is ‘contractionary’ but how does the change in these expenses and revenues actually effect AD?

[DoctorTwo]

I know automatic stabilisers can be a little confusing, so I'll try to explain it carefully.
During a boom, economic growth is very high, probably above 4%, full employment is being achieved, and inflation is likely well above the target. During this period, those in the workforce generally earn greater income. As a result, they will have to pay more tax and may shift into higher tax brackets. This means that disposable income should rise slower. As a result, aggregate demand will rise slower and the economy overall will slow down, meaning that economic growth contracts.
In a period of negative or very slow economic growth, such as a contraction, depression, recession or trough, the population will generally be in the lower tax brackets, so the government collects less revenue. This essentially means that there should be greater disposable income, as opposed to collecting high rates of income tax. As the population has more money to spend, aggregate demand should strengthen, which will speed up economic growth.

I feel like that explanation is a bti confusing so, simply, during a boom, people pay more tax, so they don't have as much money to spend, so aggregate demand will decrease. During a downturn, people pay less tax, so they have more money to spend, which should increase aggregate demand.

[Chelsea f.c.]

With a right shifting AD curve e.g. "Mining boom" inflation increases for each given level of output I.e. Higher wages which means higher tax (bracket creep maybe topical recently ) as I enter higher taxation brackets on a higher nominal income where taxes are like a deadweight (may as well think it's money stored on the moon for this model though this is not true) which somewhat goes to reduce aggregate demand and acts as a stabiliser... whereas a leftward shifting demand curve I.e. End of "mining boom" means that inflation is Lower nominal wages are lower no bracket creep and less deadweight... though we know that taxes pay welfare which is also spent on consumption and public service wages as well taxes also pay politicians salaries where your wasting $200,000 each year for Tony abbot, Barnaby Joyce, Kevin Andrews and Eric Abetz to sit on the back bench where the economy may never see that money again... though in this model it is assumed taxes is money lost =)

[corza000]

Chelsea f.c. you are the real MVP.

Thanks!