Question

Using a supply and Demand curve for “Necessity Item" (an item that all people need), show how a basic income program would alter the equilibrium. Describe the changes to price and quantity. Using an Aggregate Supply and Demand curve, show how a basic income program would impact economic growth. What risks are possible?

Explain.

Answer 1

A basic income program is a welfare program where all citizens receive a regular stream of income from government, without any conditionalities. It increases conumer income, increasing demand for a good, shifting its demand curve rightward and increasing both its price and equilibrium quantity.

In folloing graph, D0 and S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0. As the basic income program increases demand, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

The basic income program increases government spending as well as consumption demand (arising from higher consumer income). Higher government spending increases budget deficit, to finance which government resort to borrowing, leading to higher interest rate, which dampens investment demand and lower aggregate demand. Therefore full potential of rise in aggregate demand is adversely affected. In addition, higher aggregate demand increases price level, raising the risk of inflation as well.

In following graph, AD0 and SRAS0 are initial aggregate demand and short run aggregate supply curves intersecting at point A with initial price level P0 and real GDP Y0. As the basic income program raises AD, the AD curve shifts rightward to AD1, intersecting SRAS0 at point B with higher price level P1 and higher real GDP Y1.