Answer to Question #182670 in Macroeconomics for John

Question

As the economy begins to worsen Claudia Sahm (formerly director of macroeconomic policy at the Washington Center for Equitable Growth) proposes a new policy that provides American's with an automatic lump-sum stimulus payment when the three-month average national unemployment rate rises by at least .5 % compared to its low in the last year.

What kind of policy is this? Discuss the effects of this policy proposal if it was in place as the changes in (a) took place.

Answer 1

This kind of policy is the fiscal policy.

Unemployment negatively impacts the federal government's ability to generate income and also tends to reduce economic activity. When unemployment is high, fewer people are paying taxes to the government. Low consumer spending makes it more difficult for businesses to thrive and expand, which dampens economic growth.