Suppose the federal government increases the unemployment benefits financed by higher income taxes.In this case,which of the following is likely to occur?

A) An increase in the equilibrium real GDP
B) A redistribution of disposable income from the employed to the unemployed
C) An increase in the interest rate
D) An increase in the discount rate charged by the Central Bank
E) An increase in the income of the rich and a decrease in the income of the poor

Question

Myriam Hernandez · Accepted Answer

Final Answer : B, Explanation :  Increasing unemployment benefits financed by higher income taxes will lead to a higher disposable income for the unemployed, thus redistributing income from the employed to the unemployed. This could potentially lead to a decrease in the labor force participation rate and an increase in the unemployment rate, which could negatively impact the economy. However, it is possible that the increase in disposable income for the unemployed could also increase consumption and stimulate economic growth, leading to an increase in the equilibrium real GDP. Increases in interest rates and discount rates charged by the central bank are unlikely to occur as a direct result of the increase in unemployment benefits. There is no reason to believe that this policy would have a direct impact on the income of the rich and the poor.

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