Question

At the height of the housing crisis in the US, in 2009-2010 the Government decided for a temporary extension of unemployment benefits to 99 weeks, from the standard six months.    (In parallel way, during this Corona time, millions of unemployed seek the same kind of benefits. )

a) What do you think of this decision? What are the positive and negative impacts of this decision to the society and the overall economy?

b) How would J.M. Keynes react to this extension?

c) How would a Classical Economist say about it?

d) Along with the Unemployment Benefits, during the Corona time, as well as previous recessions, the Government poured in billions dollars to stimulate the economy through various programs (to individual taxpayers as well as small, medium, and large businesses). Some worry about the future consequence, such as Inflation. According to you, how does the increase in government spending on those programs might or might not have effect on Inflation?

Answer 1

Extension of unemployment benefits covers the economic losses arising due to unemployment which would have reduced the aggregate demand and escalated recession for longer periods. However drawback being higher inflation due bto extensive unemployment benefits.

Such policies would be welcomed by classical economists as they assume expansionary fiscal policy as bestctool for recession. However Keynesian wouldn't have reacted well, as they believe only expansionary monetary policy can alleviate from recession.

In recent Coronavirus cases, when both government and US Federal reserve pumped in 484 billion dollars and 2 trillion dollar respectively, economists assumed inflation to soar. However a different opinion suggests that people are in fear of job losses amd thus they shall hoard more money in cash and spend lesser which would decrease GDP. Simultaneously crowding out effects pccur as private sector spending goes down due to higher government spending.

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