Unemployment insurance usually expires at approximately 26 weeks. During the 2007–2009 crisis, unemployment benefits were extended for some workers. The extended benefits expired in June 2010, but Congress passed a new extension in July. Discussing this extension, an article in the Economist states, “Congress had never before failed to extend benefits when unemployment remained above 7.2%, and this week’s action marked the seventh extension in this recession.”
a. Use the IS–MP graph to show how an automatic stabilizer such as unemployment benefits works.
b. What would have been the consequences of having let unemployment insurance benefits expire after 26 weeks?
c. Can you think of any reason why extensions of unemployment insurance benefits might be harmful to the economy?