i) Automatic Stabilisers
Some tax and expenditure programs change automatically with the level of economic activity. These are called Automatic Stabilizers. Automatic stabilisers refer to how fiscal instruments (taxes and government spending) influence the growth rate and help counter swings in the economic cycle.

• In a period of high economic growth, automatic stabilisers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues as people earn more and pay more income tax. With higher growth, there will also be a fall in unemployment, so the government will spend less on unemployment benefits.
• In a recession, economic growth becomes negative. However, automatic stabilisers will help to limit the fall in growth. With lower incomes, people pay less tax, and government spending on unemployment benefits will increase. This helps limit the fall in aggregate demand.
  (2.5 marks)

ii) Discretionary Fiscal Policy
Discretionary fiscal policy refers to deliberate changes in taxes or spending. The government cannot control certain aspects of the economy related to fiscal policy. For example:

• The government can control tax rates but not tax revenue, which depends on household income and corporate profits.
• Government spending depends on government decisions and the state of the economy.

Discretionary fiscal policy can be divided into two:

• Expansionary fiscal policy: This increases government expenditures and/or decreases taxes, causing the government’s budget deficit to increase or its budget surplus to decrease. This policy will shift the aggregate demand curve to the right.
• Contractionary fiscal policy: This decreases government expenditures and/or increases taxes, causing the government’s budget deficit to decrease or its budget surplus to increase, shifting the aggregate demand curve to the left.
  (2.5 marks)