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3. The country of Boldovia has no unemployment insurance benefits and a tax system that uses only lump-sum taxes. The neighboring country of Moldovia has generous unemployment benefits and a tax system in which residents must pay a percentage of their income. Which country will experience greater variation in real GDP in response to demand shocks, positive and negative? Explain. *

Answer :

Answer: Boldovia will experience greater vacation in real GDP than Molfovia.

Explanation:

Boldovia will experience higher vacation in real gross domestic product (GDP) than Moldovia because Boldovia does not have automatic stabilizers while Moldovia has automatic stabilizers.

In Moldovia the effects of slump will be reduced by the unemployment insurance benefits, this will support residents incomes, and the effects of booms will be reduced because the tax revenues will rise. In Boldovia, incomes will not be supported during the period of slumps because of no unemployment insurance.

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