Briefly explain how unemployment insurance can stabilize the economy. Give an example.

What will be an ideal response?

The unemployment insurance program is another source of automatic stabilization. During recessions, unemployment is usually high and unemployment compensation payments increase, providing income that will be consumed by recipients. During boom periods, such payments will fall as the number of unemployed decreases. For example, suppose a town is dependent on a steel mill, and during a recession, the mill lays off a large number of workers. Without a regular income, the affected households will sharply decrease their purchases, and many businesses in that town will suffer economically. However, unemployment provides some money to help those laid off workers buy food and pay their mortgage, etc. The reduction in consumer spending will not be as sharp as if there were no unemployment insurance, and fewer businesses will face catastrophic reductions in sales. The effect of unemployment compensation on this one town can be applied to the entire economy.