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effects of the increase in unemployment benefits

Suppose that the unemployment benefits provided by the private sector (firms) are increased permanently, please answer the following questions:

A) What will happen to Y (GDP), r (real interest rate), P(price level), and I(investment), in the short run?

B) What will happen to Y, r, P, and I, in the long run?

Solution Preview

A) In the short run, an increase in unemployment benefits will reduce the incentive for those on unemployment to seek employment. Also, there will be a reduced incentive for those that are working to value their jobs as highly and continue working. Using the AD/AS model to analyze this, we would expect the SRAS curve to fall and shift to the left. ...

Solution Summary

Effects of the increase in unemployment benefits are clearly reiterated.

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