Imagine the government of Country A is debating whether to offer a welfare payment in the form of a cash transfer to all

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Imagine The Government Of Country A Is Debating Whether To Offer A Welfare Payment In The Form Of A Cash Transfer To All 1 (120.31 KiB) Viewed 17 times

Imagine the government of Country A is debating whether to offer a welfare payment in the form of a cash transfer to all individuals below the poverty line in the country. Cabinet minister X opposes the idea as he believes that people will then reduce their work effort and become dependent on welfare. Cabinet Minister Y counters X's argument and says that as the financial sector is facing a lot of frictions, the cash transfer will in fact remove liquidity constraints that people below the poverty line are facing and in fact increase labor supply. Cabinet Minister X and Y now turn to you and ask you to resolve the debate. (a) Please provide your view on the above question, namely, whether Cabinet Minister X or Y is correct and why. (b) If you think Cabinet Minister Y is correct regarding frictions in the financial market, will this always imply an increase in labor supply? Clarify using an example of a liquidity constraint that people below the poverty line might face