Under what conditions would you observe automatic stabilizers at work?

Automatic stabilizers are mechanisms built into the fiscal policy framework that help moderate the fluctuations of the economy without the need for explicit government intervention. They primarily operate during economic downturns and expansions.

When the economy is in a recession, automatic stabilizers come into play as they help cushion the impact by increasing government spending or reducing tax revenues automatically. For example, during a recession, unemployment benefits increase as more people lose jobs, and tax revenues decline as individuals earn less income. This helps to sustain consumer spending and aggregate demand, mitigating the recession's severity.

In contrast, during periods of economic expansion, automatic stabilizers work in reverse; as incomes rise, tax revenues increase and government spending on social safety nets typically decreases. However, these effects are more pronounced during downturns. Therefore, observing automatic stabilizers at work is most evident in a recessionary context, where their role is crucial in stabilizing the economy.