Economic policy theory

1. [100 words] According to Rowell and Cornnelly (2012), the phrase “moral hazard” was initially coined in insurance industry to describe a rise of insurance claims after the insurance purchases. This idea has been further developed in economics to provide causality between the two. These days, moral hazard refers to an increase in the expected loss (probability or amount of loss conditional on an event occurring) due to insurees behaving more carelessly as a result of purchasing insurance (Kunreuther and Michel-Kerjan, 2014). Using the concept of moral hazard, describe potential concerns of providing unemployment insurance.

2. [200 words] Read the following article: Generous_UI.pdf. Review the US stimulus package and forecast its economic impact on labor markets focusing on its moral hazard effects. Given the current circumstances, would you recommend another UI extension? Explain.