Economics probles

4. Ignore for the rest of the problem the impatient agents above. The Great Depression hits this economy, and wipes out the savings of an entire generation. Consequently, the government decides to change the system so that the money coming from the younger generation is im- mediately given as benefits to the older generation. So it takes $50 from each young agent and gives it directly to an older agent. (a) What is the terminology for this social security system? (b) How much do individuals privately save now? (c) How does national savings now compare to national savings with the original social security system? 5. Finally, suppose that after the Great Depression, there is a baby boom. So where all gener- ations were the same size, now one and only one generation is twice as large as the others. (We are still using the same social security system as in part (d).) (a) When the baby boom generation is young, what are the social security benefits of the older generation as compared to the usual benefits? (b) Once the baby boom generation is old, what social security benefits does it receive compared to the usual social security benefits? (c) What could the government do to "smooth out" the effect of the baby boom? Assume that the government has no other funds that it can use to solve the problem. 6. We looked at two social security systems here: one described in part (b) and one described in part (d). (a) Which system would handle the baby boom better? Explain. (b) Why not just switch to that system today? (Brief explanation.) 3 Unemployment Insurance Consider the Unemployment Insurance (UI) program in the United States, which typically replaces 50% of a worker's wages for up to 26 weeks after job loss. Evaluate the following claims by deter- mining whether each claim is True or False and present a concise explanation for your answer: 1. The empirical observation that those receiving UI benefits remain unemployed longer than those not receiving UI benefits, conditional on unemployment, indicates that UI causes longer unemployment spells. 2. Assuming that UI causes longer unemployment spells, this clearly indicates that generosity of the program should be reduced. 3. Individual perfect experience rating - where the government effectively loans to individuals 50% of their wages while unemployed, but individuals have to repay the loan once re-employed - would result in longer unemployment durations and increased likelihood of worker layoff. 4. Assume that UI causes individuals to become more "picky" about their job choices, passing up jobs that are less pleasant or pay less wages. While everyone would like to have nice jobs, this increased picky-ness is socially inefficient. 5. Assume it is true that the extension of unemployment insurance benefits during economic downturns hinders the economy's GDP by preventing workers from going back to work and thus prolongs the length of a recession. Then, it follows that the government should not extend unemployment benefits during an economic downturn.5 Adverse Selection This question is difficult, but we hope it will illuminate the potential problem that markets have with dealing with adverse selection. So please do not get discouraged. Consider the Rothschild and Stiglitz model of insurance discussed in class and recitation. In particular, assume that people in the economy have the same wealth W and each face a potential loss of size L. However, individuals vary in their probability of experiencing this loss: A fraction A are high risk and have a probability pu of a loss, while a fraction 1 - A are lower risk and have a probability pr