Economics of Macro Issues 7th Edition by Roger LeRoy Miller,Daniel Benjamin

Exercise 4

Some people argue that unemployment benefits (i.e., cash payments by the government to people who are unemployed) help stimulate the economy. The reasoning is that without the benefits the incomes of unemployed people would be lower, and thus their spending on goods and services would be lower. Keeping in mind that unemployment benefits are generally no more than 40 to 50 percent as large as the typical earnings of people when working, answer these questions:
i. How do unemployment benefits change the incentive to be employed ? Explain.
ii. Is it possible that a system of unemployment benefits could actually cause total spending in the economy to fall? Explain.