What is it important for economists and policy makers to ans

What is it important for economists and policy makers to answer the effect of Unearned Income on earnings, consumption, and savings?

Solution

The unearned income or the transfer income distorts the market by increase in savings, consumption and demand in the market. The transfer income will lead to increase in demand without an increase or opposite effect in the circular flow. Rather it is considered as a leakage from the system. The income thus earned without any potential service from the recipient will mean that the national income gets reduced by the equivalent amount.

For example Permanent increases in Social Security benefits raise aggregate consumption even though the tax increases to pay for the higher benefits are often enacted in the very same legislation. A permanent increase in social security will raise the interest rates.