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. )

What do you think of this decision? What are the positive and negative impacts of this decision to the society and the overall economy? How would J.M. Keynes react to this extension? How would a Classical Economist say about it? 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

Answer :

(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?

At the time of economic crisis, unemployment benefits will help the unemployed by giving some money in hand to spend. Recession is a consequence of low demand and resulting fall in aggregate supply, which further leads the economy towards depression except if economy is recouped. Decrease in aggregate demand because of recession makes basic circumstance followed by drop in purchasing power, standard of living and demand for consumer goods. Accordingly investment demand likewise falls.

So as to better the circumstance from worsening, unemployment benefits are probably going to assist the economy with being steady by boosting aggregate demand.

Negative impact on the economy is that the unemployment advantage is a sort of transfer payments. Transfer payments has no immediate impact on yield. Government spending increments and makes monetary weight which may build spending shortages.

Another weakness is that a few people in the economy are reluctant to work. Unemployment benefits may diminish their motivating forces and efforts to get a new line of work. Befits for 99 weeks might be expensive for the economy.

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

J.M. Keynes would support the temporary unemployment benefits as he was in fabor of boosting aggregate demand during recession. Notwithstanding, he never supported colossal government spending as a level of GDP. Government expenditure in beneficial sector was supported by Keynes. Keynes would most likely support the unemployment benefits for a specific time and not for a time of 99 weeks.

(c) :- How would a Classical Economist say about it?

On the other hand, in spite of the Keneysian see, classical economists, for example, Adam Smith, J.B.Say or Alfred Marshall, during any broad economic downturn, recessionary phase or market imperfection, the "free-forces" of various market factors and parts would consequently prompt economic stabilization without much or any government or administrative interventions. In view of the Say's law or Adam Smith's thought of "undetectable hands", an economy is self-fit to create its own demand for goods and services delivered by it or at the end of the day, in light of a specific degree of the general creation of goods and services in the economy, the demand for those goods and services would be normally and self-sufficiently produced to arrive at a general equilibrium in the economy. The market forces and segments would uninhibitedly prompt the general equilibrium condition in the market where the aggregate supply meets the aggregate demand. Therefore, in this case, in light of the classical view, the unemployment benefits and its prolonged sustenance would be commonly incapable or lacking to restore economic stabilization during the stoppage phase as the self-governing and unregulated cooperation between the various demand and supply-side parts or qualities in the market would normally prompt higher labor demand by the organizations and business organizations in the labor market and again activate the general work level in the economy.

(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?

When all is said in done, the two principle monetary instruments accessible to the government to modify or change the general economic circumstance or situation incorporate tax policies and government spending or expenditure. Presently, during the economic downturns or recessionary effects brought about by unfavorable occasions, for example, flare-up of COVID-19 or breakdown in the financial exchange or land market, the government can either decrease various tax rates on people, families, and firms or business organizations or increment spending or expenditure on various infrastructural and government assistance projects and tasks to quicken economic recuperation as a major aspect of the expansionary monetary policies. These monetary efforts and activities would expectedly build the AD in the goods market in the economy and holding the aggregate supply or as consistent, would prompt an expansion in the general value level of goods and services. Thus, if the AS doesn't change much according to the adjustment in the AD in the goods market, it can prompt short-run inflationary outcomes in the economy. Nonetheless, note that if the government embraces a tax cut approach as a major aspect of the expansionary financial upgrade, at that point a decrease in corporate and business tax for firms and business organizations can conceivably prompt higher creation and aggregate supply of goods and services in the economy all the while with the AD(due to fundamentally increment in aggregate utilization expenditure) which might forestall such inflationary possibilities dependent on the AD-AS model.

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