In a country, a terrible recession occurred. Suppose the government increased unemployment...

Question:

In a country, a terrible recession occurred. Suppose the government increased unemployment insurance, but the AD remained unchanged. What would happen? Explain.

How to Deal with a Recession:

Recession refers to a period characterized by a general decline in economic performance and a drop in Gross Domestic Product (GDP). The government should be in the front-line in dealing with the recession in order to prevent its negative effects.

Answer and Explanation:

If the increase in unemployment insurance does not change the aggregate demand, the recession is expected to continue. In other words, it means that the strategy is inefficient in dealing with the recession due to its inability to correcting the decline in economic performance. Indeed, unemployment insurance barely kick-starts growth in order to pull the economy out of the recession. Notably, the unchanged aggregate demand leads to a further decline in economic growth because of lack of sufficient money to be transferred to the circular flow of income. Consequently, low levels of aggregate demand translate to a stagnated economy due to lack of productivity and investments leading to heightened levels of unemployment. Therefore, the government should use other expansionary strategies that are capable of increasing the supply of money as well as aggregate demand. Expansionary fiscal policies; low taxes and increase in government expenditure have the potential of remedying the condition in place of the increase in unemployment insurance.


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The Cyclical Phases of the US Economy

from Introduction to Macroeconomics: Help and Review

Chapter 17 / Lesson 2
699

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