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Word Count: 495
How are Automatic Stabilizers Used to Combat InflationIn todays economy there are devices present called automatic stabilizers Automatic stabilizers are mechanisms which aid in the correction of an economic problem without the interference of anyone or anything They are perhaps most useful to combat demand - pull inflation Demand - pull inflation is when prices rise because the economy cannot produce enough goods to satiate the economy An automatic stabilizer that is beneficial to combat such a problem is a progressive tax A progressive tax is a tax that becomes a higher rate for each increasing level of gross domestic product If such a tax is present within the economy when the society becomes more prosperous such as in the situation with demand-pull inflation the citizens are taxed more therefore decreasing the marginal propensity to consume and decreasing consumption The marginal propensity to consume is the fraction of any change in disposable income spent for consumer goods If this decreases demand will not be as high above or even above where the supply is therefore reducing the demand - pull inflation AS P2 C1 P1 AD2 C2 AD145 degThe first graph shows the increase of price due to the increase of demand in the vertical range of the aggregate supply curve or demand pull inflation The second graph shows the decrease of consumption due to the increase in the tax rate at the new higher income Tax T2RateT1 G Income levelThe graph above shows 2 different progressive taxes T2 is more progressive than T1 because the tax rate increases more rapidly as the income level increases
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