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Chapter 13: Q 1 Critical thinking question (page 293)

1. How does unemployment compensation function as an automatic stabilizer?

Short Answer

Expert verified

As a result, when pensioners have used up all of their Social Security benefits, they will not be able to raise equilibrium GDP in a one-shot boost.

Step by step solution

01

Introduction

The given is the context about the unemployment compensation function

The objective is to determine how does the function act as an automatic stabilizer

02

Step 1

The existing Social Security system permits pensioners to be compensated from current workers' pockets. If every dollar they receive is spent solely on consumption, it contributes to GDP.

However, because that dollar is paid by workers as payroll taxes, the GDP shrinks at the same time. As a result, the net effect on GDP is approaching zero dollars.

03

Step 2 

As a result, when pensioners have used up all of their Social Security benefits, they will be unable to raise equilibrium GDP in a single shot. However, because the reduction in GDP and the addition in GDP are originally equal, the multiplier impact may be the same.

However, if income is compounded over numerous rounds or periods, equilibrium GDP may rise.

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Most popular questions from this chapter

A government is currently operating with an annual budget deficit of \(40 billion. The government has determined that every \)10 billion reduction in the amount it borrows each year would reduce the market interest rate by 0.1 percentage point. Furthermore, it has determined that every 0.1-percentage-point change in the market interest rate generates a change in planned investment expenditures in the opposite direction equal to \(5 billion. The marginal propensity to consume is 0.75. Finally, the government knows that to eliminate an inflationary gap and take into account the resulting change in the price level, it must generate a net leftward shift in the aggregate demand curve equal to \)40 billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? (Hint: How much new private investment spending is induced by each $10 billion decrease in government spending? )

Assume that MPC= 45when answering the following questions.

a. If government expenditures rise by \( 2 billion, by how much will the aggregate expenditure curve shift upward? By how much will equilibrium real GDP per year change?

b. If taxes increase by \) 2 billion, by how much will the aggregate expenditure curve shift downward? By how much will equilibrium real GDP per year change?

Based on Schwinn's conclusions, is the government likely to be able to boost real GDP with an increase in government spending if it has raised and lowered its expenditures a number of times in previous months? Explain your reasoning.

Describe how certain aspects of fiscal policy function as automatic stabilizers for the economy

Assume that equilibrium real GDP is \( 18.2 trillion and full-employment equilibrium (F E) is \) 18.55 trillion. The marginal propensity to save is 17. Answer the questions using the data in the following graph.

a. What is the marginal propensity to consume?

b. By how much must new investment or government spending increase to bring the economy up to full employment?

c. By how much must government cut personal taxes to stimulate the economy to the full employment equilibrium?
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