Benefits Rise as Layoffs Spread
The question
The economy of Cassaria has entered a downturn and layoffs are spreading. Under a program already written into law, every worker who loses a job automatically begins receiving unemployment benefit payments from the government, and total benefit payments across Cassaria climb sharply without any new vote by the legislature. Assume the effect of the layoffs themselves is already reflected in the graph as drawn. Show only the additional effect of these benefit payments on Cassaria's economy this year, holding all else constant. Show the effect on the Fiscal Policy (AD-AS) graph.
Equilibrium at Real GDP (Y) 92, Price Level (PL) 66
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Benefits Rise as Layoffs Spread: the worked answer
On the Fiscal Policy (AD-AS) graph, AD shifts right.
Why AD shifts right
Unemployment benefits are transfer payments, so they are not counted in government purchases, but they hand disposable income to households that have just lost their wage income and those households spend a large share of every dollar they receive. Higher consumption at every price level shifts aggregate demand to the right, and the multiplier carries that spending through the economy just as a tax cut would. No firm's per-unit production cost changes and the economy's resources and technology are unchanged, so short-run and long-run aggregate supply both stay put.
What happens to the equilibrium
The price level and real GDP are both higher than they would otherwise be, so the recessionary gap the downturn is opening ends up smaller than it would have been without the payments.
The mistake students make on this one
Many students shift aggregate demand left, reading the stem as a recession question and drawing the layoffs a second time. The layoffs are already in the graph by assumption, and the change being asked about is the benefit expansion, which puts spendable income back into households' hands and pulls aggregate demand toward the right. Others leave the graph untouched because transfers are not part of government purchases; transfers still reach aggregate demand through the consumption they finance.
On exam day
Automatic stabilizers always push against the business cycle, so on a downturn stem decide first whether the question wants the shock or the stabilizer, and shift AD toward the side that cushions the economy.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when AD shifts right and every other curve on the Fiscal Policy (AD-AS) graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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