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Chapter 23: Problem 10

Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or less over the business cycle than it would in the absence of unemployment insurance? Briefly explain.

Short Answer

Expert verified
The existence of unemployment insurance makes it likely that consumption will fluctuate less over the business cycle than it would in the absence of unemployment insurance. The safety net it provides allows for continuity in consumption even in the event of job loss.

Step by step solution

01

Understanding Unemployment Insurance

Unemployment insurance is a social safety net program provided by the government. It is a type of insurance that provides income to individuals who have lost their jobs through no fault of their own, until they can find another job.
02

Consumption With & Without Unemployment Insurance

In the presence of unemployment insurance, workers who lose their job receive a fraction of their income. This income replaces the wage they earned when employed, enabling them to continue consuming goods and services even if they lose their job. In contrast, without unemployment insurance, workers who lose their job and their income, would need to greatly reduce their consumption until they find another job.
03

Impact on Consumption Fluctuation

Given the role of unemployment insurance in providing a safety net for workers, it's likely that consumption will fluctuate less over the business cycle with unemployment insurance than without. The existence of unemployment insurance means that workers can continue consuming even during periods of unemployment, smoothing out potential drops in consumption that might otherwise occur when they lose their job.

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